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As filed with the Securities and Exchange Commission on July 18, 2002

Registration No.  333-90108



SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


Amendment No. 1
to
FORM S-3
Registration Statement
Under
The Securities Act of 1933


Mothers Work, Inc.
(Exact name of Registrant as specified in its charter)

Delaware 5621 13-3045573
(State or other jurisdiction of
incorporation or organization)
(Primary Standard Industrial
Classification Code Number)
(I.R.S. Employer Identification No.)

456 North Fifth Street
Philadelphia, PA 19123
(215) 873-2200
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)
See Table of Additional Registrants


Dan W. Matthias
Chairman and Chief Executive Officer
456 North Fifth Street
Philadelphia, PA 19123
(215) 873-2200
(Name, address, including zip code, and telephone number, including area code, of agent for service)


COPIES TO:

Barry M. Abelson, Esq.
Daniel L. Damstra, Esq.
Pepper Hamilton LLP
3000 Two Logan Square
18th and Arch Streets
Philadelphia, PA 19103-2799
(215) 981-4000
  Morton A. Pierce, Esq.
Dewey Ballantine LLP
1301 Avenue of the Americas
New York, NY 10019-6092
(212) 259-8000

        Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.


        If the only securities being registered on this form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. / /

        If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. / /

        If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / /

        If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / /

        If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / /


CALCULATION OF REGISTRATION FEE


Title of Each Class of Securities to be Registered   Amount to be Registered   Proposed Maximum Offering Price Per Note   Proposed Maximum Aggregate Offering Price   Amount of Registration
Fee

Senior Notes   125,000   $1,000   $125,000,000   $11,500(1)

Guarantees relating to the Senior Notes   N/A   N/A   N/A   N/A(2)

(1)
Registration fee previously paid.
(2)
No separate consideration will be received for the guarantees and therefore, pursuant to Rule 457(n), no additional fee is required.

        The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.





TABLE OF ADDITIONAL REGISTRANTS

EXACT NAME AND ADDRESS
OF ADDITIONAL
REGISTRANT AS SPECIFIED
IN ITS CHARTER

  JURISDICTION OF
INCORPORATION/
FORMATION

  I.R.S. EMPLOYER
IDENTIFICATION NO.

  PRIMARY STANDARD
INDUSTRY CLASSIFICATION
CODE NUMBER


eSpecialty Brands, LLC
456 North Fifth Street
Philadelphia, PA 19123

 

Delaware

 

52-2222558

 

5621

Mother's Stores, Inc.
456 North Fifth Street
Philadelphia, PA 19123

 

Delaware

 

13-2742799

 

5621

Dan Howard Industries, Inc.
456 North Fifth Street
Philadelphia, PA 19123

 

Illinois    

 

36-2358533

 

5621

Cave Springs, Inc.
103 Springer Building
3411 Silverside Road
Wilmington, DE 19810

 

Delaware

 

51-0303603

 

6794

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

SUBJECT TO COMPLETION, DATED JULY 18, 2002

$125,000,000

LOGO

      % Senior Notes due              , 2010


        We are offering $125,000,000 of our              % Senior Notes due              , 2010. We will pay interest on the notes every               and              . The first interest payment will be made on              , 2003. The notes will mature on              , 2010.

        We may redeem some or all of the notes on or after              , 2006 at the redemption prices set forth in this prospectus. In addition, we may redeem up to 35% of the aggregate principal amount of the notes before              , 2005 with the net proceeds of equity offerings. If we experience a change of control, holders of the notes may require us to repurchase the notes. There is no sinking fund for the notes.

        The notes will be senior unsecured obligations of Mothers Work, Inc. and will rank senior to our subordinated indebtedness. Our obligations under the notes will be guaranteed on a senior basis by our domestic restricted subsidiaries. The notes will be effectively subordinated to all of our secured debt, including our credit facility.

        Concurrently with this offering, we also are publicly offering 1,100,000 shares of our common stock, which includes 100,000 shares being sold by selling stockholders, by means of a separate prospectus and registration statement. This offering is contingent on the closing of the concurrent equity offering, but the concurrent equity offering is not contingent on the closing of this offering.

        Investing in the notes involves risks. See "Risk Factors" beginning on page 13.

 
  Price to
Public (1)

  Underwriting
Discounts and
Commissions

  Proceeds to
Mothers Work

 
Per Note     %   %   %
Total   $   $   $  
(1)
Plus accrued and unpaid interest, if any, from                            , 2002.

        Delivery of the notes, in book-entry form only, will be made on or about              , 2002.

        Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

Credit Suisse First Boston   Fleet Securities, Inc.

The date of this prospectus is                            , 2002.


[IFC]



TABLE OF CONTENTS

 
  Page
PROSPECTUS SUMMARY   1
RISK FACTORS   13
USE OF PROCEEDS   21
CAPITALIZATION   22
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA   23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS   25
BUSINESS   35
MANAGEMENT   46
PRINCIPAL STOCKHOLDERS   48
RELATED PARTY TRANSACTIONS   49
DESCRIPTION OF CERTAIN INDEBTEDNESS AND PREFERRED STOCK   50
DESCRIPTION OF NOTES   54
MATERIAL U.S. FEDERAL TAX CONSIDERATIONS   93
UNDERWRITING   96
NOTICE TO CANADIAN RESIDENTS   97
LEGAL MATTERS   98
EXPERTS   98
WHERE YOU CAN FIND ADDITIONAL INFORMATION   99
INCORPORATION OF DOCUMENTS BY REFERENCE   99
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS   F-1

        You should rely only on the information contained in this document or to which we have referred you. We have not authorized anyone to provide you with information that is different. This document may only be used where it is legal to sell these securities. The information in this document may only be accurate on the date of this document.


        Mothers Work®, A Pea in the Pod®, Mimi Maternity®, Motherhood®, Motherhood Maternity Outlet®, MaternityMall.com®, Mothertime™, iMaternity™, Mimi™, TrendTrack™ and Dan Howard™ are trademarks and service marks of Mothers Work, Inc. This prospectus also includes trademarks, service marks and trade names owned by other companies. All trademarks, service marks and trade names included in this prospectus are the property of their respective owners.



FORWARD-LOOKING STATEMENTS

        Some of the information in this prospectus, including the information incorporated by reference, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The forward-looking statements involve a number of risks and uncertainties. A number of factors could cause our actual results, performance, achievements or industry results to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. These factors include, but are not limited to:

        In addition, these forward-looking statements necessarily depend upon assumptions, estimates and dates that may be incorrect or imprecise and involve known and unknown risks, uncertainties and other factors. Accordingly, any forward-looking statements included in this prospectus do not purport to be predictions of future events or circumstances and may not be realized. 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 any of these terms, or comparable terminology, or by discussions of outlook, plans, goals, strategy or intentions. Given these uncertainties, we caution investors not to place undue reliance on these forward-looking statements. We assume no obligation to update any of these forward-looking statements to reflect actual results, changes in assumptions or changes in other factors affecting these forward-looking statements.

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PROSPECTUS SUMMARY

        This summary highlights information more fully described elsewhere in this prospectus. Because this is a summary, it is not complete and does not contain all of the information that you should consider before investing in the notes. You should read the entire prospectus carefully, including the SEC filings that we have incorporated by reference into this prospectus, the "Risk Factors" section and our consolidated financial statements and the related notes included elsewhere in this prospectus, before deciding to invest in our notes. When we refer to "notes" in this prospectus, we are referring to our    % Senior Notes due            , 2010, unless otherwise indicated. When used in this prospectus, the terms "Mothers Work," "we," "our" and "us" refer to Mothers Work, Inc. and its subsidiaries, unless otherwise specified.

Mothers Work, Inc.

        We are the leading designer and retailer of maternity apparel in the United States with 893 stores in all 50 states, Puerto Rico and Canada. We operate our stores under the Motherhood Maternity (Motherhood), Mimi Maternity (Mimi) and A Pea in the Pod brands and also sell our merchandise on the Internet at our MaternityMall.com and brand-specific websites. Our strategy is to fulfill all of an expectant mother's clothing needs, including casual and career wear, formal attire, underwear and outerwear in a high-service store environment. We use a vertically integrated business model to ensure that we offer the broadest assortment of in-stock, fashionable merchandise. Our three retail brands collectively target all of the price segments in maternity apparel, ranging from Motherhood at value prices to A Pea in the Pod at luxury prices. Our stores include 132 leased departments, primarily Motherhood-branded, within department and specialty stores. We have achieved 14.3% compounded annual sales growth over the past five years, resulting in sales of $388.3 million for the fiscal year ended September 30, 2001.

        We were founded by Dan and Rebecca Matthias in 1982 as a mail order maternity apparel catalog. We began operating retail stores in 1985 and completed our initial public offering in 1993. We acquired Motherhood and A Pea in the Pod in 1995 and iMaternity in October 2001 to increase our industry presence, address multiple price points in maternity apparel and improve operating productivity. Since the acquisitions of Motherhood and A Pea in the Pod, we have developed and grown these brands along with our Mimi brand. In connection with each of our acquisitions, we have consolidated some overlapping locations and closed under-performing stores, resulting in increased sales per square foot and better absorption of store overhead.

        We believe that there are approximately $1 billion of maternity clothes sold each year in the United States. We also believe that there is an opportunity to grow the market by selling maternity clothes to pregnant women who currently purchase loose-fitting or larger-sized non-maternity clothing as a substitute for maternity wear. In addition, we believe that demand for maternity apparel is relatively stable when compared to non-maternity apparel. Expectant mothers continue to need to replace their clothes and the current rate of approximately four million U.S. births per year has remained stable over the last decade. We believe that maternity apparel is also less fashion sensitive than specialty apparel in general, as demand is driven by the need to replace wardrobe basics as opposed to current fashion trends. Our competitors in the value-priced maternity apparel business are primarily moderate-priced department stores, discount stores and web-based maternity operations. Competition in mid- and luxury-priced maternity apparel is highly fragmented. We compete primarily with single location retailers and a handful of multi-location maternity operations, with the largest of these competitors having only twelve stores.

        Motherhood.    Motherhood serves the value-priced and highest volume portion of the maternity apparel industry and is our largest chain, with 610 stores as of March 31, 2002. Motherhood is positioned on everyday low prices, broad assortment, fashion and quality. We believe that the Motherhood customer shops at moderate-priced department stores and discount stores when she is not

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expecting. Motherhood stores average approximately 1,400 square feet and are located primarily in enclosed malls, strip and power centers and central city business districts. Motherhood stores include 87 outlet locations that carry predominantly Motherhood-branded product, as well as some closeout merchandise. In addition, we operate 128 Motherhood leased departments in department and specialty stores such as Macy's, Rich's, Lazarus and Babies "R" Us. Between 1998 and 2000, we successfully broadened Motherhood's customer base by lowering price points approximately 40% to 45%. This new price position significantly expanded the brand's target market, increased revenues per store and increased unit volumes.

        Mimi.    We have 109 Mimi stores, as of March 31, 2002, that serve the middle market price segment of the maternity apparel industry. The brand is positioned as young, contemporary, fun and affordable. We believe that the Mimi customer shops at department stores and specialty apparel chains when she is not expecting. Mimi stores average approximately 1,600 square feet and are located primarily in regional malls, lifestyle centers and central business districts. The stores carry Mimi-branded product, as well as a small selection of maternity merchandise developed by contemporary vendors exclusively for Mimi. We also operate ten Mimi leased departments, six of which have been opened after March 31, 2002, in Marshall Field's, Bloomingdale's and Macy's. Mimi was historically price positioned just below A Pea in the Pod. When Motherhood's prices were lowered, there was an opportunity for Mimi to broaden its customer base by including lower price points. Mimi was, therefore, recently repositioned and its merchandise price points now range from just above Motherhood to the lower end of A Pea in the Pod. This repositioning has resulted in an expansion of Mimi's target market, and we believe that we now have the opportunity to significantly increase the number of Mimi stores.

        A Pea in the Pod.    We believe that A Pea in the Pod is the premier maternity brand in the United States. The brand is positioned as exclusive, designer and aspirational. Our 42 stores, as of March 31, 2002, average approximately 2,400 square feet and are located in the most upscale venues, including Madison Avenue, Oak Street, Beverly Hills, South Coast Plaza and Bal Harbour. In addition to offering A Pea in the Pod and Mimi brands, we seek out designer and contemporary manufacturers and help them develop maternity versions of their styles exclusively for our A Pea in the Pod stores. Publicity, including celebrities wearing our clothes, is an important part of the marketing and positioning of the brand. As scarcity is part of the concept's luxury image, we have chosen to further develop the brand primarily by optimizing our customers' in-store experience rather than by opening new stores. We, therefore, continuously upgrade the quality of the locations, our store designs, the product styling and our publicity to enhance brand image and maximize profitability.

Our Competitive Strengths

        We are the leader in maternity apparel.    We are the only nationwide chain of maternity specialty stores in the United States and believe that our brands are the most recognized in maternity apparel. We have established a broad distribution network, with stores in a wide range of geographic areas and retailing venues. In addition, we believe that we have a leading position at every price point of maternity apparel through our three distinct brands. Our leadership position enables us to gain a unique understanding of the needs of our maternity customers, as well as keep abreast of fashion and product developments. We enhance our leadership position, increase market penetration and further build our brands by operating leased departments in department and baby specialty stores.

        We offer a wide product assortment.    A primary consideration for expectant mothers shopping for maternity clothes is product assortment, as pregnant women need to replace almost their entire wardrobe. We believe that we offer the widest selection of merchandise in the maternity apparel industry. We also offer product for multiple seasons, as pregnant women's clothing needs vary depending on their due date. Our ability to offer a broad assortment of product is due, in large part, to

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our vertically integrated business model, which includes our extensive in-house design and contract manufacturing capabilities, as well as our rapid inventory replenishment system. We believe that many of our competitors rely predominantly on the decreasing number of wholesale maternity apparel vendors who often offer more limited assortments.

        We are vertically integrated.    We design, contract manufacture and distribute approximately 90% of our merchandise. We believe that vertical integration enables us to offer the widest product selection in maternity apparel, to respond quickly to fashion trends and to ensure industry-leading in-stock levels. We combine our in-house design expertise, domestic and international sourcing capabilities, rapid inventory replenishment process and extensive proprietary systems to maximize inventory turnover, sales per square foot and gross profit margins. During the six months ended March 31, 2002, continuous improvements in our international sourcing capabilities have assisted us in improving inventory turnover and increasing gross margins by 3.3 percentage points as compared with the prior year period.

        We utilize a rapid inventory replenishment system.    Because maternity apparel is a niche industry, store profitability is optimized in smaller store formats. We are able to profitably offer a wide selection of merchandise in stores averaging approximately 1,500 square feet due, in large part, to our rapid inventory replenishment system. Our proprietary system enables us to offer more than 3,000 stock keeping units, or SKUs, per store without dedicating retail space to storage. We coordinate the rapid replenishment of inventory for all of our stores through our distribution center, which sends individually tailored selections to specific store locations between two and six times per week. We believe that most of our competitors do not rapidly replenish all styles in their store inventories and, therefore, cannot continuously offer comparable merchandise availability and assortment.

        We have proprietary systems that support our business.    In order to support our vertically integrated business model, we have developed a fully integrated, proprietary enterprise resource planning (ERP) system. This system includes point-of-sale (POS) systems, our TrendTrack merchandise analysis and planning system, our materials requirement planning (MRP) system and our web-based, global sourcing and logistics systems. These systems also support our automated picking and sorting systems and other aspects of our logistics infrastructure. We believe that our proprietary systems are critical to our competitive strengths of offering a broad product assortment, responding quickly to fashion trends, minimizing manufacturing costs and rapidly replenishing inventory in our stores.

        We are able to obtain prime real estate locations.    We believe that we are able to obtain attractive real estate locations due to the brand awareness of our concepts, our multiple price point approach and our sought after maternity customer. We are the only maternity apparel retailer to provide mall operators with the ability to choose from three differently priced concepts, depending on the mall's target demographics. We are also able to provide multiple stores for malls that want to offer their maternity customers a range of price alternatives. In addition, in the case of multi-mall operators, we have the flexibility to supply packages of stores in multiple malls. As a result, we have been able to locate stores in many of what we believe are the most desirable shopping malls in the country and are able to obtain attractive locations within these malls.

        We have a highly experienced and recently expanded management team.    Dan Matthias, Chairman and Chief Executive Officer, and Rebecca Matthias, President and Chief Operating Officer, founded the company 20 years ago and are leaders in maternity apparel retailing. David Mangini joined our management team in August 2001 as Executive Vice President — General Merchandise Manager with more than 20 years of apparel merchandising experience, including senior positions at Gap Inc. and Limited Brands, Inc. Mr. Mangini has developed a merchandising and planning organization by brand to further support each concept's future growth.

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Our Growth Strategy

        We intend to continue growing our business primarily by opening new Motherhood and Mimi locations and improving profit margins. We expect to finance our growth principally from internally generated cash flow.

        Continue to grow our Motherhood store base.    We have grown our Motherhood store base from 217 stores at the time of acquisition in 1995 to 610 stores as of March 31, 2002, excluding leased departments. In fiscal 2000 and 2001, we opened 64 and 43 Motherhood stores, respectively, excluding leased departments and net of store closings. Based on our internal research and the number of suitable malls and outlet centers without a Motherhood store, we believe that the maternity apparel industry can support approximately 450 additional Motherhood stores and 100 additional Motherhood outlet stores in the United States. We expect to open approximately 99 and 67 new Motherhood stores and outlets in fiscal 2002 and 2003, respectively, net of store closings. We expect that the Motherhood stores opened in fiscal 2002 will include 54 conversions from acquired iMaternity locations. We currently have five Motherhood stores in Canada and believe that we can open additional stores in Canada, as well as in other international locations. We may also have the opportunity to grow the number of our Motherhood leased departments in the United States.

        Accelerate the growth of our Mimi store base.    We have 109 Mimi stores as of March 31, 2002, excluding leased departments. In fiscal 2000, we did not open any Mimi stores, net of store closings. In fiscal 2001, we opened three Mimi stores, excluding leased departments and net of store closings. We have recently widened the range of price points offered at Mimi to include lower prices and believe that this repositioning has significantly expanded Mimi's potential customer base. As a result, we expect to accelerate the growth of Mimi stores. Based on our internal research and the estimated number of suitable locations, we believe that the maternity apparel industry can support approximately 200 additional Mimi stores in the United States. We plan to open approximately 33 and 28 Mimi stores in fiscal 2002 and 2003, respectively, net of store closings. We expect that the Mimi stores opened in fiscal 2002 will include 25 conversions from acquired iMaternity locations.

        Increase our gross and operating margins.    We expect to increase our gross and operating margins primarily by continuing to develop our international sourcing capabilities. We have been transitioning from domestic to international manufacturing and believe that there are still significant opportunities to continue to lower our cost of goods. These opportunities include: (i) increasing volume purchasing as our business grows; (ii) improving supply chain efficiencies and communication with suppliers; (iii) shifting more of our domestic production to international factories; and (iv) identifying new manufacturers in additional and existing countries to minimize costs. We expect to continue to domestically source a portion of our product in order to quickly respond to changing fashion demands. We also expect that current initiatives to enhance the fashion apparel selection at Motherhood and Mimi will improve margins by increasing product demand and reducing markdowns.

        Expand and remodel our stores.    Approximately 25% of our non-outlet Motherhood stores are too small to carry our full line of merchandise, including plus-sized maternity wear, as well as our entire assortment of nursing apparel and accessories. We plan to expand the size of these stores primarily by relocating them within their current malls as space becomes available. Since the beginning of fiscal 1999, we have expanded 41 stores by increasing their average square footage from approximately 950 square feet to approximately 1,850 square feet. Recent results from completed relocations and expansions indicate that enlarging undersized Motherhood stores has increased their sales and profits. There are also opportunities to expand a portion of our Mimi store base to improve sales and profits. In addition, we plan to accelerate our store remodeling efforts and expect to remodel a substantial portion of our stores over the next several years.

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        Improve new store return on investment.    We have recently redesigned the new store prototypes for each of our concepts to reduce build-out costs and improve returns on investment. The new prototypes are very similar to our current store base, but use more of a location's existing conditions and more prefabrication during construction. As a result, we have substantially reduced the capital expenditures needed for an average new store and expect to significantly increase our returns on new store investments.

        Leverage our unique customer relationships.    We believe that we serve approximately 2.5 million of the approximately 4.0 million women who have babies in the United States each year. We also believe that we serve approximately 1.3 million of the approximately 1.6 million first-time mothers each year. As a result, we have developed an extensive customer file of mothers. We have an opportunity to leverage these relationships by offering, at our customers' election, additional baby-related products and services through new and existing strategic alliances. We are supporting these efforts, as well as improving our customer service and customer relationship management capabilities, with investments in database hardware and software.


Recent Developments

        For the months of April, May and June 2002, we reported comparable store sales increases of 2.1%, 4.5% and 6.3%, respectively.

        On July 15, 2002, we issued a press release announcing our unaudited financial results for the third quarter ended June 30, 2002 and providing financial guidance for the fourth quarter of fiscal 2002 and the next three fiscal years.

        As of the end of the quarter, we operated 898 locations, including 739 Motherhood locations (including leased departments), 116 Mimi locations (including leased departments) and 43 A Pea in the Pod stores. Net sales for the third quarter were $122.6 million, a 17.9% increase from $104.0 million in the third quarter of the prior year. Comparable store sales increased 4.1% for the quarter (based on 718 locations), in contrast to a comparable store sales decrease of 2.0% in the prior year (based on 638 locations). Gross margin was 55.5%, as compared to 52.2% for the third quarter of last year. Earnings before interest, taxes, depreciation and amortization (EBITDA) was $17.7 million for the third quarter, a 30% increase from $13.6 million for the third quarter of the prior year. Net income available to common stockholders was $6.8 million, an increase of 99% from $3.4 million in the prior year. Earnings per common share (diluted) were $1.45, a 53% increase from $0.95 in the third quarter of fiscal 2001. Net income for the quarter was affected by our adoption of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets," which requires that goodwill no longer be amortized. We recognized $0.6 million of goodwill amortization in the third quarter of fiscal 2001, or $0.15 per common share (diluted).

        For the nine months ended June 30, 2002, net sales were $341.8 million, a 15.6% increase from $295.7 million in the prior year. Comparable store sales increased 1.0% for the nine month period (based on 665 locations), in contrast to a comparable store sales decrease of 1.0% in the prior year (based on 607 locations). Gross margin was 53.1%, as compared to 49.8% for the nine months ended June 30, 2001. Our EBITDA was $34.9 million, a 33% increase from $26.4 million in the prior year. Net income available to common stockholders was $8.6 million, a 300% increase from $2.2 million for the same period in fiscal 2001. Earnings per common share (diluted) were $2.18, an increase of 263% from $0.60 per common share (diluted) for the nine month period in fiscal 2001. Net income and earnings per common share for the nine month period were affected by the adoption of SFAS No. 142, as we recognized $1.6 million of goodwill amortization in fiscal 2001, or $0.45 per common share (diluted).

        As of June 30, 2002, our balance sheet reflects cash and cash equivalents of $2.2 million, credit facility borrowings of $1.5 million, long term debt of $98.3 million, and stockholders' equity of

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$26.3 million. On an adjusted basis, after giving effect to this offering and the concurrent equity offering, as of June 30, 2002, our cash and cash equivalents would have been $19.6 million, we would have had no credit facility borrowings, our long term debt would have been $129.7 million and our stockholders' equity would have been $47.7 million.

        For the quarter ending September 30, 2002, we are planning for low single digit comparable store sales increases, an improvement in gross margin of approximately 2.0 percentage points, and an EBITDA margin substantially consistent with that of the same quarter in the prior year. We expect our capital expenditures for the fiscal year ending September 30, 2002 to be in the range of $10 million to $12 million, having incurred capital expenditures of $5.1 million through June 30, 2002. Assuming the completion of this offering and the concurrent equity offering, we expect to incur certain one-time charges, which relate to the early repayment of our existing senior notes and the planned purchase of our Series C preferred stock, of approximately $3.0 million, including approximately $2.6 million of non-cash charges, which will reduce earnings per common share (diluted) by approximately $0.70 for fiscal 2002.

        Over the next three fiscal years, our goal is to increase sales by an average of approximately 10% annually, based on our plan to open new Motherhood and Mimi stores and our planned 1% to 2% comparable store sales growth. However, we expect somewhat less than 10% sales growth in fiscal 2003, primarily due to the increased number of new store openings beginning in fiscal 2003 and the impact of iMaternity stores closed during fiscal 2002 which contributed to fiscal 2002 sales but will not contribute to fiscal 2003 sales. We also have a goal to increase our gross margin by the end of the next three years by approximately 2.5 percentage points. If we were able to achieve this gross margin goal, we believe our operating income margin would increase by approximately 0.7 percentage points by the end of this three-year period. The targeted improvement in gross margin for the same period would be partially offset by an expected increase in operating expenses as a percentage of sales resulting from new store openings and our assumed low comparable store sales growth. Consistent with the goals described in the preceding sentences, our goal is to increase our earnings per share by approximately 18% to 20% annually over the next three years.

        We plan to fund our capital expenditures over the next three years principally from cash flow from operations, and we plan for the annual expenditures to be higher than fiscal 2002, primarily due to discretionary store remodeling initiatives and a greater number of planned store openings. We are planning our fiscal 2003 capital expenditures to be between $20 million and $25 million, with approximately one-third targeted for our store remodeling program.

        The goals set forth above, as well as the other forward-looking information contained or incorporated by reference in this prospectus, constitute forward-looking statements that are subject to various risks and uncertainties. A number of factors could cause our actual results, performance, achievements or industry results to be materially different from these forward-looking statements. See "Forward-Looking Statements" and "Risk Factors."

Our Principal Executive Offices

        Our principal executive offices are located at 456 North Fifth Street, Philadelphia, Pennsylvania 19123. Our telephone number is (215) 873-2200, and our website address is www.motherswork.com. Information included or referred to on any of our websites is not a part of this prospectus.

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The Offering

Issuer   Mothers Work, Inc.

Securities Offered

 

$125 million aggregate principal amount of      % Senior Notes due            , 2010.

Maturity Date

 

            , 2010.

Interest

 

The notes will bear interest at the rate of      % per annum, payable semi-annually in arrears on            and            of each year, commencing            , 2003.

Condition of this Offering

 

This offering of notes is contingent on the closing of the concurrent equity offering.

Ranking

 

The notes will be senior, unsecured obligations of Mothers Work. As such, the notes will rank equally in right of payment with all other senior unsecured indebtedness of Mothers Work. See "Description of Notes — Ranking." The notes will be effectively subordinated to all of our secured debt and the future and existing liabilities of any of our subsidiaries that are not guarantors of the notes.

 

 

As of March 31, 2002, on a pro forma basis after giving effect to this debt offering and our concurrent equity offering, we would have approximately $130.1 million of debt outstanding, including the notes, of which $5.1 million would be secured debt.

Optional Redemption

 

We may redeem the notes beginning on                        , 2006. The initial redemption price is    % of their principal amount, plus accrued and unpaid interest. The redemption price will decline each year after 2006 and will be 100% of the principal amount plus accrued and unpaid interest, beginning on                        , 2009.

 

 

In addition, on or before            , 2005, we may redeem up to 35% of the aggregate principal amount of the notes issued under the indenture at our option with the proceeds of certain equity offerings at    % of their principal amount plus accrued and unpaid interest. See "Description of Notes — Optional Redemption."

Change of Control

 

If we experience a change of control, holders of the notes will have the right to require us to repurchase their notes at a price equal to 101% of the principal amount of the notes on the date of the repurchase, plus accrued and unpaid interest, if any, to the date of repurchase. See "Description of Notes — Change of Control."

Covenants

 

We will issue the notes under an indenture. The indenture will, among other things, restrict our ability and the ability of our restricted subsidiaries, to:

 

 

•  incur additional indebtedness;

 

 

 

7



 

 

•  pay dividends or make other distributions in respect of our equity securities, or purchase or redeem our capital stock, or make certain investments;

 

 

•  permit any restriction on the ability of our subsidiaries to pay dividends, make loans or transfer assets to us;

 

 

•  sell assets, including the capital stock of our subsidiaries;

 

 

•  enter into any transactions with our affiliates;

 

 

•  transfer any capital stock of any subsidiary or permit any subsidiary to issue capital stock;

 

 

•  create liens;

 

 

•  enter into certain sale/leaseback transactions; and

 

 

•  effect a consolidation or merger or transfer of all or substantially all of our assets.

 

 

These limitations will be subject to a number of important qualifications and exceptions. For more details, see "Description of Notes — Certain Covenants."

Use of Proceeds

 

Our net proceeds from this debt offering will be approximately $120.7 million after deducting underwriting discounts and the estimated offering expenses payable by us. Concurrently with this debt offering, we are offering 1,100,000 shares of our common stock, which includes 100,000 shares being sold by selling stockholders, by means of a separate prospectus and registration statement. The net proceeds that we expect to receive from the concurrent equity offering, based upon a public offering price per share of $34.30 (the closing common stock price on July 17, 2002), will be approximately $32.0 million, after deducting underwriting discounts and estimated offering expenses payable by us.

 

 

We expect to use the aggregate net proceeds from this debt offering and the concurrent equity offering in the following order: (i) to repay the existing 125/8% senior notes, plus accrued and unpaid interest; (ii) to repay our subordinated notes issued to former holders of shares of our Series A Preferred Stock in lieu of accrued and unpaid dividends; (iii) to pay all accrued and unpaid dividends on the outstanding shares of our Series A Preferred Stock and Series C Preferred Stock; (iv) to redeem all of the outstanding shares of our Series A Preferred Stock and to purchase, through an offer to purchase, all of the outstanding shares of our Series C Preferred Stock; (v) to repay the outstanding borrowings under our credit facility and (vi) for general corporate purposes.

        For additional information regarding the notes, see the "Description of Notes" section of this prospectus.

8



Risk Factors

        Investment in the notes involves certain risks. You should carefully consider the information under "Risk Factors" and all information included in this prospectus before investing in the notes.

Concurrent Equity Offering

        Concurrently with this offering, we also are offering 1,100,000 shares of common stock, which includes 100,000 shares being sold by selling stockholders, by means of a separate prospectus and registration statement. This offering is contingent on the closing of the concurrent equity offering, but the concurrent equity offering is not contingent on the closing of this offering.

9


Summary Consolidated Financial and Operating Data

        The following tables set forth summary consolidated statement of operations data, pro forma statement of operations data, operating data, cash flow and other data, and balance sheet data as of and for the periods indicated. The summary consolidated statement of operations and balance sheet data for each of the three fiscal years presented below are derived from our audited consolidated financial statements. The summary consolidated statement of operations and balance sheet data set forth below as of March 31, 2002 and 2001 and for the six months then ended are derived from our unaudited consolidated financial statements. You should read this information in conjunction with "Selected Consolidated Financial and Operating Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and the related notes included elsewhere in this prospectus.

 
  Fiscal Year Ended September 30,
  Six Months Ended March 31,
 
 
  2001
  2000
  1999
  2002
  2001
 
 
   
   
   
  (Unaudited)

 
 
  (in thousands, except per share amounts)

 
Statement of Operations Data:                                
Net sales   $ 388,306   $ 366,283   $ 299,735   $ 219,250   $ 191,699  
Costs of goods sold     194,320     183,300     150,402     105,635     98,730  
   
 
 
 
 
 
Gross profit     193,986     182,983     149,333     113,615     92,969  
Selling, general and administrative expenses     172,795     157,809     127,390     101,251     86,245  
   
 
 
 
 
 
Operating income     21,191     25,174     21,943     12,364     6,724  
Interest expense     (14,867 )   (15,877 )   (15,132 )   (7,020 )   (7,714 )
Other income     594                  
   
 
 
 
 
 
Income (loss) before income taxes     6,918     9,297     6,811     5,344     (990 )
Income tax provision (benefit)     3,456     4,249     3,424     1,988     (469 )
   
 
 
 
 
 
Net income (loss)     3,462     5,048     3,387     3,356     (521 )
Dividends on preferred stock     1,491     1,389     1,251     1,533     746  
   
 
 
 
 
 
Net income (loss) available to common stockholders   $ 1,971   $ 3,659   $ 2,136   $ 1,823   $ (1,267 )
   
 
 
 
 
 
Income (loss) per share — basic   $ 0.57   $ 1.06   $ 0.60   $ 0.52   $ (0.37 )
   
 
 
 
 
 
Income (loss) per share — diluted   $ 0.55   $ 1.01   $ 0.57   $ 0.49   $ (0.37 )
   
 
 
 
 
 
Average shares outstanding — basic     3,456     3,443     3,538     3,540     3,453  
Average shares outstanding — diluted     3,605     3,641     3,754     3,764     3,453  

Pro Forma Statement of Operations Data(1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Net income (loss) available to common stockholders   $ 1,971   $ 3,659   $ 2,136   $ 1,823   $ (1,267 )
Goodwill amortization     2,207     2,216     2,216         1,060  
   
 
 
 
 
 
Pro forma net income (loss) available to common stockholders   $ 4,178   $ 5,875   $ 4,352   $ 1,823   $ (207 )
   
 
 
 
 
 
Pro forma income (loss) per share — basic   $ 1.21   $ 1.71   $ 1.23   $ 0.52   $ (0.06 )
   
 
 
 
 
 
Pro forma income (loss) per share — diluted   $ 1.16   $ 1.61   $ 1.16   $ 0.49   $ (0.06 )
   
 
 
 
 
 

(1)
As a result of our adoption of SFAS No. 142 on October 1, 2001, we no longer amortize goodwill. The pro forma statement of operations data reflect an adjustment to exclude goodwill amortization expense recognized in the prior periods as presented.

10


 
  Fiscal Year Ended September 30,
  Six Months Ended March 31,
 
 
  2001
  2000
  1999
  2002
  2001
 
 
   
   
   
  (Unaudited)

 
 
  (in thousands, except ratios and operating data)

 
Operating Data:                                
Same store sales growth (decrease)(1)     (2.4 )%   8.3 %   12.9 %   0.3 %   (0.6 )%
Average net sales per gross square foot(2)(3)   $ 365   $ 390   $ 382   $ 359   $ 372  
Average net sales per store(2)(3)   $ 520,000   $ 545,000   $ 521,000   $ 509,000   $ 535,000  
Gross square footage at period end(4)     1,100,000     980,000     856,000     1,287,000     1,056,000  
Number of stores at period end                                
  Motherhood     523     480     416     610     505  
  Mimi     74     71     71     109     73  
  A Pea in the Pod     42     41     41     42     40  
  Leased Departments     132     111     97     132     133  
   
 
 
 
 
 
    Total     771     703     625     893     751  
   
 
 
 
 
 

Cash Flow and Other Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
EBITDA(5)   $ 33,700   $ 37,125   $ 32,459   $ 17,248   $ 12,647  
Cash flows provided by operating activities     19,507     18,623     428     12,341     8,954  
Cash flows used in investing activities     (12,127 )   (13,828 )   (10,306 )   (2,741 )   (5,820 )
Cash flows provided by (used in) financing activities     (98 )   (2,859 )   7,395     (17,197 )   (3,782 )
Capital expenditures     12,212     13,619     10,087     3,236     5,717  
Ratio of total debt to EBITDA(3)     3.8 x   3.4 x   4.0 x   3.1 x   3.8 x
Ratio of EBITDA to interest expense(3)     2.3 x   2.3 x   2.1 x   2.7 x   2.1 x
Ratio of earnings to fixed charges(3)     1.3 x   1.4 x   1.3 x   1.6 x   1.1 x

(1)
Same store sales figures include stores that have been in operation for at least 12 full months at the beginning of the period for which such data is presented.
(2)
Based on locations in operation during the entire preceding twelve-month period.
(3)
For the six-month periods ended March 31, 2002 and 2001, the data is based on results from the preceding twelve-month period.
(4)
Based on all locations in operation at the end of the period.
(5)
We have presented EBITDA to enhance your understanding of our operating results. EBITDA represents net income (loss) before interest expense, income taxes, depreciation and amortization. EBITDA is provided because it is an important measure of financial performance commonly used in the retail industry to determine the value of companies within the industry and to define standards for borrowing from institutional lenders. You should not construe EBITDA as an alternative to operating income as an indicator of our operating performance, or as an alternative to cash flows from operating activities as a measure of our liquidity, as determined in accordance with generally accepted accounting principles. We may calculate EBITDA differently than other companies.

11


 
   
   
   
  As of March 31, 2002
 
  Fiscal Year Ended September 30,
   
  As Adjusted for the Concurrent Debt and Equity Offerings(1)
 
  2001
  2000
  1999
  Actual
 
   
   
   
  (Unaudited)

 
  (in thousands)

   
   
Balance Sheet Data (at end of period):                              
Working capital   $ 32,509   $ 29,684   $ 24,021   $ 24,768   $ 49,791
Total assets     185,177     179,586     177,608     208,558     213,460
Total debt     128,842     127,179     128,661     118,983     130,140
Accrued dividends on Series A Preferred Stock     7,055     6,037     4,648     5,652    
Series C Cumulative Redeemable Preferred Stock                 18,880    
Stockholders' equity                              
  Series A Preferred Stock     10,773     11,500     11,500     7,819    
  Common stockholders' equity (deficit)     3,968     1,250     (2,432 )   9,761     38,617
   
 
 
 
 
    Total stockholders' equity   $ 14,741   $ 12,750   $ 9,068   $ 17,580   $ 38,617
   
 
 
 
 

(1)
The balance sheet data, as adjusted for the concurrent debt and equity offerings, is calculated as if the net proceeds from these offerings were used (i) to repay the existing 125/8% senior notes, plus accrued and unpaid interest, (ii) to repay our subordinated notes issued to former holders of shares of our Series A Preferred Stock in lieu of accrued and unpaid dividends, (iii) to pay all accrued and unpaid dividends on the outstanding shares of our Series A Preferred Stock and Series C Preferred Stock, (iv) to redeem all of the outstanding shares of our Series A Preferred Stock and to purchase, through an offer to purchase, all of the outstanding shares of our Series C Preferred Stock, (v) to repay the outstanding borrowings under our credit facility and (vi) for general corporate purposes.

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RISK FACTORS

        Investing in the notes involves a high degree of risk. You should carefully consider the following risks, as well as the other information contained in this prospectus, before purchasing the notes. We may encounter risks in addition to those described below. Additional risks not currently known to us or that we currently deem immaterial may also impair our business operations and your investment in the notes.

Risks Relating to the Offering

Our substantial indebtedness could adversely affect our financial health which would prevent us from fulfilling our obligations under the notes.

        We have now, and after the debt offering will continue to have, a significant amount of indebtedness. As of March 31, 2002, on a pro forma basis after giving effect to this debt offering and our concurrent equity offering, we would have approximately $130.1 million of debt outstanding, including $5.1 million of secured debt. See "Use of Proceeds."

        Our substantial indebtedness could have important consequences for you. For example, it could:

        If we are unable to meet our expenses and debt obligations, we may need to refinance all or a portion of our indebtedness before the scheduled maturity dates of such debt, sell assets or raise equity. On such maturity dates, we may need to refinance our indebtedness if our operations do not generate enough cash to pay such indebtedness in full and if we do not raise additional capital. Our ability to refinance will depend on the capital markets and our financial condition at such time. We cannot assure you that we would be able to refinance any of our indebtedness, sell assets or raise equity on commercially reasonable terms or at all, which could cause us to default on our obligations and impair our liquidity. See "Description of Certain Indebtedness and Preferred Stock."

Despite our level of indebtedness, we and our subsidiaries will be able to incur substantially more debt.

        We and our subsidiaries will be able to incur substantial additional debt in the future. As of March 31, 2002, on a pro forma basis after giving effect to this debt offering and our concurrent equity offering, we would have $47.6 million available for additional borrowing under our credit facility. See "Use of Proceeds." In addition, although the indenture governing the notes and the terms of our credit facility will contain restrictions on the incurrence of additional indebtedness, these restrictions are

13


subject to a number of qualifications and exceptions, and the indebtedness incurred in compliance with these restrictions could be substantial.

Your right to receive payments on the notes is effectively subordinated to the rights of our existing and future secured creditors and the creditors of any of our non-guarantor subsidiaries.

        Holders of our secured indebtedness and the guarantors' secured indebtedness will have claims that are prior to your claims as holders of the notes to the extent of the value of the assets securing that other indebtedness. The notes will be effectively subordinated to all of that indebtedness to the extent of the related security. In the event of any distribution or payment of our assets in any foreclosure, dissolution, winding-up, liquidation, reorganization or other bankruptcy proceeding, holders of secured indebtedness will have a prior claim to those of our assets that constitute their collateral. Holders of the notes will participate ratably in our remaining assets with all holders of our other unsecured indebtedness that is deemed to be of the same class as the notes or which is not expressly subordinated to the notes, and potentially with all of our other general creditors, based upon the respective amounts owed to each holder or creditor. In any of the foregoing events, we cannot assure you that there will be sufficient assets to pay amounts due on the notes. As a result, holders of notes may receive less, ratably, than holders of secured indebtedness. In addition, your claims will be effectively subordinated to the claims of creditors of any subsidiaries that do not guarantee the notes.

        As of March 31, 2002, our total secured debt outstanding was approximately $25.5 million, including current maturities. On a pro forma basis after giving effect to this debt offering and our concurrent equity offering, we would have secured debt outstanding of approximately $5.1 million. See "Use of Proceeds."

The terms of our debt instruments impose financial and operating restrictions.

        Our credit facility and the indenture governing the notes contain restrictive covenants that will limit our ability to engage in activities that may be in our long-term best interests. These covenants limit or restrict, among other things, our ability to:

        These limitations and restrictions may adversely affect our ability to finance our future operations or capital needs or engage in other business activities that may be in our best interests. In addition, our ability to borrow under our credit facility is subject to borrowing base requirements. If we breach any of the covenants in our credit facility or our indenture, we may be in default under our credit facility or our indenture. If we default, the holders of the notes or the lender under our credit facility could declare all borrowings owed to them, including accrued interest and other fees, to be due and payable. If we were unable to repay the borrowings under our credit facility when due, the lender under the

14


credit facility could also proceed against the collateral granted to them, which could result in the holders of the notes receiving less, ratably, than those lenders.

We may not have the ability to raise the funds necessary to finance the change of control offer required by the indenture.

        Upon the occurrence of "change of control" events specified in "Description of Notes," you may require us to purchase your notes at 101% of their principal amount, plus accrued and unpaid interest. In some circumstances, a change of control could result from events beyond our control. We cannot assure you that we will have the financial resources to purchase your notes, particularly if that change of control event triggers a similar repurchase requirement for, or results in the acceleration of, any of our other indebtedness. Our credit facility provides that certain change of control events, as defined in the credit facility, will constitute a default and could result in the acceleration of our indebtedness under that facility. The indenture governing our existing notes contains a similar provision. Any debt agreements we enter into in the future may contain similar provisions.

Your right to require us to redeem the notes is limited.

        The holders of notes have limited rights to require us to purchase or redeem the notes in the event of a takeover, recapitalization or similar restructuring, including an issuer recapitalization or similar transaction with management. Consequently, the change of control provisions of the indenture will not afford any protection in a highly leveraged transaction, including a transaction initiated by us, if the transaction does not result in a change of control or otherwise result in an event of default under the indenture. Accordingly, the change of control provision is likely to be of limited usefulness in such situations.

The notes may not have an active market and the price may be volatile, so you may be unable to sell your notes at the price you desire or may not be able to sell them at all.

        The notes are a new issue of securities for which there is currently no active trading market. We cannot ensure that a liquid market will develop for the notes, that you will be able to sell any of the notes at a particular time, if at all, or that the prices you receive, if or when you sell the notes, will be above their initial offering price. The underwriter has advised us that it intends to make a market in the notes, but it is not obligated to do so and may discontinue any market-making in the notes at any time in its sole discretion and without notice. Future trading prices of the notes in any market that may develop will depend on many factors, including our operating performance and financial condition, prevailing interest rates, the market for similar securities and general economic conditions.

        In addition, we do not intend to apply for listing of the notes on any securities exchange or on any automated dealer quotation system. Declines in the market for high yield securities generally may also adversely affect the liquidity of, and trading market for, the notes.

Federal and state statutes allow courts, under specific circumstances, to void guarantees and require note holders to return payments received from guarantors.

        Under the federal bankruptcy law and comparable provisions of state fraudulent transfer laws, a guarantee could be voided, or claims in respect of a guarantee could be subordinated to all other debts of the guarantor if, among other things, the guarantor, at the time it incurred the indebtedness evidenced by its guarantee:

15


        In addition, any payment by that guarantor pursuant to its guarantee could be voided and required to be returned to the guarantor, or to a fund for the benefit of the creditors of the guarantor.

        The measures of insolvency for purposes of these fraudulent transfer laws will vary depending upon the law applied in any proceeding to determine whether a fraudulent transfer has occurred. Generally, however, a guarantor would be considered insolvent if:

You may not be able to seek remedies against Arthur Andersen LLP, our former independent accountant.

        Our consolidated financial statements for the year ended September 30, 1999 were audited by Arthur Andersen LLP, our former independent auditor. On June 15, 2002, a jury in Houston, Texas found Arthur Andersen LLP guilty of a federal obstruction of justice charge arising from the federal government's investigation of Enron Corp. SEC rules require us to present our audited financial statements in various SEC filings, along with Arthur Andersen LLP's consent to our inclusion of its audit report in those filings. Arthur Andersen LLP has not consented to the use of its audit report on our financial statements in this registration statement, and we do not expect to receive Arthur Andersen LLP's consent in any future SEC filings. Without this consent, it may become more difficult for you to seek remedies against Arthur Andersen LLP. Furthermore, relief in connection with claims which may be available to stockholders under the federal securities laws against auditing firms may not be available as a practical matter against Arthur Andersen LLP should it cease to operate or be financially impaired.

Risks Relating to Our Business and Industry

We may not be successful in expanding our business and opening new stores.

        Our growth depends on our ability to successfully open and operate new stores on a profitable basis. This expansion will place increased demands on our management, operational and administrative resources. These increased demands and operating complexities could cause us to operate our business less effectively, which, in turn, could cause a deterioration in the financial performance of our stores and slow our new store growth. Our planned expansion will also require that we continually monitor and upgrade our management information and other systems, as well as our distribution infrastructure.

        Our ability to open and operate new stores successfully depends on many factors, including, among others, our ability to:

16


        There can be no assurance that we will be able to achieve our store expansion goals. Even if we succeed in opening new stores as planned, we cannot assure you that our newly-opened stores will achieve revenue or profitability levels comparable to those of our existing stores in the time periods estimated by us, or at all. If our stores fail to achieve or are unable to sustain acceptable revenue and profitability levels, we may incur significant costs associated with operating or closing those stores.

We are heavily dependent on our management information systems and our ability to improve and upgrade these systems from time to time.

        The efficient operation of our business is heavily dependent on our fully-integrated, internally-developed management information systems. In particular, we rely on point-of-sale terminals, which provide information to our customized TrendTrack merchandise analysis and planning system used to track sales and inventory. The TrendTrack system helps integrate our design, manufacturing, distribution and financial functions, and also provides daily financial and merchandising information. As a result, our business and operations could be materially and adversely affected if our systems were inoperable or inaccessible.

        From time to time, we improve and upgrade our management information systems. We have recently begun deploying and upgrading a proprietary Internet-based point-of-sale system and integrating this system with our current systems. If we are unable to maintain and upgrade our systems or to convert to and integrate new and updated systems in an efficient and timely manner, our business and results of operations could be materially and adversely affected.

Our comparable store sales and quarterly operating results have fluctuated in the past and can be expected to continue to fluctuate in the future.

        Our comparable store sales and quarterly results of operations have fluctuated in the past and can be expected to continue to fluctuate and are affected by a variety of factors, including:

        If, at any time, our comparable store sales or quarterly results of operations decline or do not meet the expectations of Wall Street research analysts, the price of our common stock could decline substantially.

We rely significantly on foreign sources of production.

        We receive apparel and other merchandise from foreign sources, both purchased directly in foreign markets and indirectly through domestic vendors with foreign sources. To the extent that any of our

17


vendors are located overseas or rely on overseas sources for a large portion of their products, any event causing a disruption of imports, including the imposition of import restrictions, could harm our ability to source product. This disruption could materially limit the merchandise that we would have available for sale and reduce our revenues and earnings. The flow of merchandise from our vendors could also be adversely affected by financial or political instability, or war, in any of the countries in which the goods we purchase are manufactured. Trade restrictions in the form of tariffs or quotas, or both, applicable to the products that we sell also could affect the import of those products and could increase the cost and reduce the supply of products available to us. In addition, decreases in the value of the U.S. dollar against foreign currencies could increase the cost of products that we purchase from overseas vendors.

We could be materially and adversely affected if our distribution operations were disrupted.

        To support our retail operations, we operate a distribution facility in Philadelphia, Pennsylvania. Finished garments from contractors and other manufacturers are inspected and stored for distribution to our stores. We do not have other distribution facilities to support our distribution needs. As a result, if this distribution facility were to shut down or otherwise become inoperable or inaccessible for any reason, we could incur significantly higher costs and longer lead times associated with the distribution of our products to our stores during the time it takes to reopen or replace the facility. In light of our strategic emphasis on rapid replenishment as a key competitive advantage, a distribution disruption might have a disproportionately adverse effect on our operations and profitability relative to other retailers. In addition, the loss or material disruption of service from any of our shippers could have a material adverse impact on our business and results of operations.

Our stores are heavily dependent on the customer traffic generated by shopping malls.

        We depend heavily on locating our stores in prominent locations within successful shopping malls in order to generate customer traffic. We cannot control the development of new shopping malls, the availability or cost of appropriate locations within existing or new shopping malls or the success of existing or new mall stores.

        The success of all of our mall stores will depend, in part, on the ability of each mall's anchor tenants, such as large department stores, other tenants and area attractions to generate consumer traffic in the vicinity of our stores, and the continuing popularity of malls as shopping destinations. Sales volume and mall traffic may be adversely affected by economic downturns in a particular area, the closing of anchor tenants or competition from non-mall retailers and other malls where we do not have stores.

Our success depends on our ability to identify and rapidly respond to fashion trends.

        The apparel industry is subject to rapidly changing fashion trends and shifting consumer demands. Accordingly, our success depends on the priority that our target customers place on fashion and our ability to anticipate, identify and capitalize upon emerging fashion trends. Our failure to anticipate, identify or react appropriately to changes in styles or trends could lead to, among other things, excess inventories and higher markdowns, as well as the decreased appeal of our brands.

The failure to retain our existing senior management team or to attract and retain highly skilled and qualified personnel could adversely affect our business.

        Our business requires disciplined execution at all levels of our organization in order to timely deliver and display fashionable merchandise in appropriate quantities in our stores. This execution requires experienced and talented management. We currently have a management team with a great deal of experience with us and in apparel retailing. If we were to lose the benefit of this experience and, in particular, if we were to lose the services of Dan Matthias, our Chairman and Chief Executive

18


Officer, or Rebecca Matthias, our President and Chief Operating Officer, our business could be materially and adversely affected.

        In addition, as our business expands, we believe that our success will depend greatly on our continued ability to attract and retain highly skilled and qualified personnel. There is a high level of competition for personnel in the retail industry. The inability to meet our staffing requirements in the future at costs that are favorable to us, or at all, could impair our ability to increase revenue and could otherwise harm our business.

Our quarterly operating results and inventory levels may fluctuate as a result of seasonality in the maternity clothing industry.

        Our business, like that of other retailers, is seasonal. Results for any quarter are not necessarily indicative of the results that may be achieved for a full fiscal year. A significant portion of our net sales and profits are realized during the first and third fiscal quarters, corresponding to the holiday and spring selling seasons, respectively. Seasonal fluctuations also affect our inventory levels, as we usually order merchandise in advance of peak selling periods and sometimes before new fashion trends are confirmed by customer purchases. We must carry a significant amount of inventory, especially before the holiday and spring selling periods. If we are not successful in selling our inventory during this period, we may be forced to rely on markdowns or promotional sales to dispose of the excess inventory or we may not be able to sell the inventory at all, which could have a material adverse effect on our business and results of operations.

Our business depends on sustained demand for maternity clothing and is sensitive to economic conditions and consumer spending.

        Our business depends upon sustained demand for maternity clothing. Our future performance will be subject to a number of factors beyond our control, including demographic changes. If demand for maternity clothing were to decline for any reason, such as a decrease in the number of pregnancies, our operating results could be adversely affected.

        In addition, the specialty apparel retail business historically has been subject to cyclical variations. Consumer purchases of specialty apparel products, including maternity wear, may decline during recessionary periods and at other times when disposable income is lower. A prolonged economic downturn could have a material adverse impact on our business and results of operations.

Our market share may be adversely impacted at any time by a significant number of competitors.

        We operate in a highly competitive environment characterized by low barriers to entry. We compete against department stores, specialty retail chains, discount stores, independent retail stores and catalog and Internet-based retailers. Many of our competitors are larger and have substantially greater resources than us. Our market share and results of operations may be adversely affected by this competition.

Our earnings would decline if we write off goodwill.

        As a result of purchase accounting for our various acquisitions, we have accumulated a substantial amount of goodwill, amounting to $55.7 million as of March 31, 2002. Following our adoption of new accounting standards effective October 1, 2001, goodwill and other intangible assets with indefinite lives are not amortized, but rather tested for impairment annually. If we determine in the future that impairment has occurred, we would be required to write off the impaired portion of goodwill, which could substantially reduce our earnings and result in a substantial decline in the price of our common stock.

19


We may be unable to protect our trademarks and other intellectual property.

        We believe that our trademarks and service marks are important to our continued success and our competitive position due to their recognition with our customers. We devote substantial resources to the establishment and protection of our trademarks and service marks. We are not aware of any pending claims of infringement or challenges to our right to use any of our trademarks and service marks in the United States. Although we actively protect our intellectual property, there can be no assurance that the actions that we have taken to establish and protect our trademarks, service marks and other intellectual property, including our rights in our management information systems, will be adequate to prevent imitation of our marks, products or services by others or to prevent others from seeking to block sales of our products as a violation of their trademarks, service marks or other proprietary rights. Also, others may assert rights in, or ownership of, our trademarks and other proprietary rights and we may not be able to successfully resolve these types of conflicts. In addition, the laws of certain foreign countries may not protect our trademarks and proprietary rights to the same extent as do the laws of the United States.

War or acts of terrorism or the threat of either may negatively impact availability of merchandise and otherwise adversely impact our business.

        In the event of war or acts of terrorism, or if either is threatened, our ability to obtain merchandise available for sale in our stores may be negatively affected. A substantial portion of our merchandise is imported from other countries. If goods become difficult or impossible to import into the United States, and if we cannot obtain such merchandise from other sources at similar costs, our sales and profit margins may be adversely affected. In the event that commercial transportation is curtailed or substantially delayed, our business may be adversely impacted, as we may have difficulty shipping merchandise to our distribution facility and stores, as well as fulfilling catalog and website orders.

20



USE OF PROCEEDS

        We will receive net proceeds from this debt offering of approximately $120.7 million after deducting underwriting discounts and the estimated offering expenses payable by us.

        Concurrently with this debt offering, we are offering 1,100,000 shares of our common stock, which includes 100,000 shares being sold by selling stockholders, by means of a separate prospectus and registration statement. The net proceeds that we expect to receive from the concurrent equity offering, based upon a public offering price per share of $34.30 (the closing share price on July 17, 2002), will be approximately $32.0 million, after deducting underwriting discounts and the estimated offering expenses payable by us. We will not receive any proceeds from the sale of shares of common stock by the selling stockholders, except for amounts representing the aggregate exercise price for shares issued upon exercise of stock options.

        This offering is contingent on the closing of the concurrent equity offering, but the concurrent equity offering is not contingent on the closing of this offering.

        We expect to use the aggregate net proceeds from this debt offering and the concurrent equity offering, including any additional proceeds that we receive from the underwriters' exercise of their over-allotment option, in the following order:

        On July 10, 2002, we commenced a cash tender offer to purchase any and all of our outstanding 125/8% senior notes. We also commenced a solicitation of consents to reduce the notice period required by the related indenture for the Company to redeem any existing senior notes that remain outstanding after consummation of the tender offer and to amend or eliminate substantially all of the principal restrictive covenants contained in the related indenture. To the extent that any existing senior notes remain outstanding after consummation of the tender offer, the Company intends to redeem these senior notes.

        Until the net proceeds from these offerings are used for such purposes, they will be invested in short-term, investment grade, interest-bearing securities.

21



CAPITALIZATION

        The following table sets forth our capitalization as of March 31, 2002:

        You should read this table in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Use of Proceeds" and our consolidated financial statements and related notes included elsewhere in this prospectus.

 
  March 31, 2002
 
 
  Actual
  As Adjusted for the Concurrent Debt and Equity Offerings(1)
 
 
  (Unaudited)
(in thousands, except share and per share amounts)

 
Cash and cash equivalents   $ 2,761   $ 4,657  
   
 
 
Short-term debt              
  Line of credit borrowings   $ 20,367   $  
  Current portion of long-term debt     434     434  
Long-term debt              
  125/8% Senior unsecured exchange notes due 2005 (net of $910 and no unamortized discount)     91,090      
        % Senior Notes Due              , 2010         125,000  
  Capital lease obligations and other long-term debt     4,706     4,706  
  Subordinated notes     2,386      
   
 
 
    Total long-term debt     98,182     129,706  
Accrued dividends on Series A preferred stock     5,652      
Series C cumulative redeemable preferred stock, $.01 par value, 302,619 shares authorized, 302,619 and no shares outstanding     18,880      
Stockholders' equity              
  Series A cumulative convertible preferred stock, $.01 par value, $280.4878 stated value; 41,000 shares authorized, 27,877 and no shares outstanding (liquidation value of $13,471 and none)     7,819      
  Series B junior participating preferred stock, $.01 par value; 10,000 shares authorized, none outstanding          
  Common stock, $.01 par value; 10,000,000 shares authorized, 3,740,547 and 4,784,547 shares outstanding     37     47  
Additional paid-in-capital     30,917     62,867  
Accumulated deficit     (21,193 )   (24,297 )
   
 
 
    Total stockholders' equity     17,580     38,618  
   
 
 
      Total capitalization   $ 161,095   $ 168,758  
   
 
 

(1)
The balance sheet data, as adjusted for the concurrent debt and equity offerings, is calculated as if the net proceeds from these offerings were used (i) to repay the existing 125/8% senior notes, plus accrued and unpaid interest, (ii) to repay our subordinated notes issued to former holders of shares of our Series A Preferred Stock in lieu of accrued and unpaid dividends, (iii) to pay all accrued and unpaid dividends on the outstanding shares of our Series A Preferred Stock and Series C Preferred Stock, (iv) to redeem all of the outstanding shares of our Series A Preferred Stock and to purchase, through an offer to purchase, all of the outstanding shares of our Series C Preferred Stock, (v) to repay the outstanding borrowings under our credit facility and (vi) for general corporate purposes.

22



SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA

        The following tables set forth selected consolidated statement of operations data, pro forma statement of operations data, operating data, cash flow and other data, and balance sheet data as of and for the periods indicated. The selected consolidated statement of operations and balance sheet data for each of the five fiscal years presented below are derived from our audited consolidated financial statements. The selected consolidated statement of operations and balance sheet data set forth below as of March 31, 2002 and 2001, and for the six months then ended are derived from our unaudited consolidated financial statements. You should read this information in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and the related notes.

 
  Fiscal Year Ended September 30,
  Six Months Ended March 31,
 
 
  2001
  2000
  1999
  1998
  1997
  2002
  2001
 
 
   
   
   
   
   
  (Unaudited)

 
 
  (in thousands, except per share amounts)

 
Statement of Operations Data:                                            
Net sales   $ 388,306   $ 366,283   $ 299,735   $ 298,991   $ 246,934   $ 219,250   $ 191,699  
Costs of goods sold(1)     194,320     183,300     150,402     158,047     113,886     105,635     98,730  
   
 
 
 
 
 
 
 
Gross profit     193,986     182,983     149,333     140,944     133,048     113,615     92,969  
Selling, general and administrative expenses(1)     172,795     157,809     127,390     139,322     124,495     101,251     86,245  
Restructuring and non-recurring charges(2)                 10,635     5,617          
   
 
 
 
 
 
 
 
Operating income (loss)     21,191     25,174     21,943     (9,013 )   2,936     12,364     6,724  
Interest expense     (14,867 )   (15,877 )   (15,132 )   (15,181 )   (13,252 )   (7,020 )   (7,714 )
Other income     594                          
   
 
 
 
 
 
 
 
Income (loss) before income taxes     6,918     9,297     6,811     (24,194 )   (10,316 )   5,344     (990 )
Income tax provision (benefit)     3,456     4,249     3,424     (7,477 )   (2,677 )   1,988     (469 )
   
 
 
 
 
 
 
 
Net income (loss)     3,462     5,048     3,387     (16,717 )   (7,639 )   3,356     (521 )
Dividends on preferred stock     1,491     1,389     1,251     1,168     1,088     1,533     746  
   
 
 
 
 
 
 
 
Net income (loss) available to common stockholders   $ 1,971   $ 3,659   $ 2,136   $ (17,885 ) $ (8,727 ) $ 1,823   $ (1,267 )
   
 
 
 
 
 
 
 
Income (loss) per share — basic   $ 0.57   $ 1.06   $ 0.60   $ (5.00 ) $ (2.45 ) $ 0.52   $ (0.37 )
   
 
 
 
 
 
 
 
Income (loss) per share — diluted   $ 0.55   $ 1.01   $ 0.57   $ (5.00 ) $ (2.45 ) $ 0.49   $ (0.37 )
   
 
 
 
 
 
 
 
Average shares outstanding — basic     3,456     3,443     3,538     3,577     3,563     3,540     3,453  
Average shares outstanding — diluted     3,605     3,641     3,754     3,577     3,563     3,764     3,453  

Pro Forma Statement of Operations Data(3):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Net income (loss) available to common stockholders   $ 1,971   $ 3,659   $ 2,136   $ (17,885 ) $ (8,727 ) $ 1,823   $ (1,267 )
Goodwill amortization     2,207     2,216     2,216     2,218     2,222         1,060  
   
 
 
 
 
 
 
 
Pro forma net income (loss) available to common stockholders   $ 4,178   $ 5,875   $ 4,352   $ (15,667 ) $ (6,505 ) $ 1,823   $ (207 )
   
 
 
 
 
 
 
 
Pro forma income (loss) per share — basic   $ 1.21   $ 1.71   $ 1.23   $ (4.38 ) $ (1.83 ) $ 0.52   $ (0.06 )
   
 
 
 
 
 
 
 
Pro forma income (loss) per share — diluted   $ 1.16   $ 1.61   $ 1.16   $ (4.38 ) $ (1.83 ) $ 0.49   $ (0.06 )
   
 
 
 
 
 
 
 

(1)
Cost of goods sold includes $10.3 million of charges recorded in fiscal 1998 associated with inventory purchase commitments and inventory write-downs in connection with the Episode restructuring activities and $0.8 million of charges recorded in fiscal 1997 associated with inventory reserves recorded in connection with discontinuing overlapping product lines. Selling, general and administrative expense recorded in fiscal 1997 includes $1.2 million of charges associated with asset impairment and other occupancy related items.
(2)
Restructuring charges include $10.6 million of charges recorded in fiscal 1998 associated with the Episode restructuring and $5.6 million of charges recorded in fiscal 1997 associated with the store consolidation restructuring activities.
(3)
As a result of our adoption of SFAS No. 142 on October 1, 2001, we no longer amortize goodwill. The pro forma statement of operations data reflect an adjustment to exclude goodwill amortization expense recognized in the prior periods as presented.

23


 
  Fiscal Year Ended September 30,
  Six Months Ended March 31,
 
 
  2001
  2000
  1999
  1998
  1997
  2002
  2001
 
 
   
   
   
   
   
  (Unaudited)

 
 
  (in thousands, except ratios and operating data)

 
Operating Data(1):                                            
Same store sales increase (decrease)(2)     (2.4 )%   8.3 %   12.9 %   13.4 %   4.3 %   0.3 %   (0.6 )%
Average net sales per gross square foot(3)(4)   $ 365   $ 390   $ 382   $ 354   $ 319   $ 359   $ 372  
Average net sales per store(3)(4)   $ 520,000   $ 545,000   $ 521,000   $ 464,000   $ 508,000   $ 509,000   $ 535,000  
Number of stores at period end     771     703     625     583     587     893     751  
Gross square footage at period end(5)     1,100,000     980,000     856,000     741,000     815,000     1,287,000     1,056,000  

Cash Flow and Other Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
EBITDA(6)   $ 33,700   $ 37,125   $ 32,459   $ 2,979   $ 15,106   $ 17,248   $ 12,647  
Adjusted EBITDA(7)     33,106     37,125     32,459     23,904     22,706     17,248     12,647  
Cash flows provided by operating activities     19,507     18,623     428     464     5,177     12,341     8,954  
Cash flows used in investing activities     (12,127 )   (13,828 )   (10,306 )   (9,592 )   (12,135 )   (2,741 )   (5,820 )
Cash flows provided by (used in) financing activities     (98 )   (2,859 )   7,395     11,086     7,361     (17,197 )   (3,782 )
Capital expenditures     12,212     13,619     10,087     9,350     11,700     3,236     5,717  
Ratio of total debt to EBITDA(4)     3.8 x   3.4 x   4.0 x   40.3 x   7.2 x   3.1 x   3.8 x
Ratio of EBITDA to interest expense(4)     2.3 x   2.3 x   2.1 x   0.2 x   1.1 x   2.7 x   2.1 x
Ratio of earnings to fixed charges(4)     1.3 x   1.4 x   1.3 x       0.2 x   1.6 x   1.1 x

Balance Sheet Data (at end of period):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Working capital   $ 32,509   $ 29,684   $ 24,021   $ 23,614   $ 32,083   $ 24,768   $ 29,449  
Total assets     185,177     179,586     177,608     172,469     171,718     208,558     172,065  
Total debt     128,842     127,179     128,661     119,982     108,112     118,983     124,548  
Accrued dividends on Series A Preferred Stock     7,055     6,037     4,648     3,397     2,229     5,652     6,783  
Series C cumulative redeemable preferred stock                         18,880      
Stockholders' equity                                            
  Series A Preferred Stock     10,773     11,500     11,500     11,500     11,500     7,819     11,500  
  Common stockholders' equity (deficit)     3,968     1,250     (2,432 )   (2,750 )   14,880     9,761     (5 )
   
 
 
 
 
 
 
 
    Total stockholders' equity     14,741     12,750     9,068     8,750     26,380     17,580     11,495  
   
 
 
 
 
 
 
 

(1)
Information for the fiscal year ended September 30, 1998 excludes 30 Episode stores which, while owned by us, were operated by a liquidator.
(2)
Same store sales figures include stores that have been in operation for at least 12 full months at the beginning of the period for which such data is presented.
(3)
Based on locations in operation during the entire preceding twelve month period.
(4)
For the six-month periods ended March 31, 2002 and 2001, the data are based on results from the preceding twelve-month period. For the fiscal year ended September 30, 1998, earnings were $26.0 million less than needed to cover our fixed charges.
(5)
Based on all locations in operation at the end of the period.
(6)
We have presented EBITDA to enhance your understanding of our operating results. EBITDA represents net income (loss) before interest expense, income taxes, depreciation and amortization. EBITDA is provided because it is an important measure of financial performance commonly used in the retail industry to determine the value of companies within the industry and to define standards for borrowing from institutional lenders. You should not construe EBITDA as an alternative to operating income as an indicator of our operating performance, or as an alternative to cash flows from operating activities as a measure of our liquidity, as determined in accordance with generally accepted accounting principles. We may calculate EBITDA differently than other companies.
(7)
Adjusted EBITDA for fiscal 2001 reflects EBITDA adjusted to eliminate the $0.6 million of other income. Adjusted EBITDA for fiscal 1998 reflects EBITDA adjusted to eliminate (a) the $10.6 million Episode restructuring charge and (b) the $10.3 million of charges recorded to cost of goods sold associated with inventory purchase commitments and inventory write-downs in connection with the Episode restructuring activities. Adjusted EBITDA for fiscal 1997 reflects EBITDA adjusted to eliminate (a) the $5.6 million store consolidation restructuring charge, (b) the $0.8 million charge recorded to cost of goods sold associated with inventory reserves recorded in connection with discontinuing overlapping product lines and (c) the $1.2 million charge recorded to selling, general and administrative expense associated with asset impairment and other occupancy related items.

24



MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

        The following discussion should be read in conjunction with our consolidated financial statements and their related notes included elsewhere in this prospectus.

Overview

        We are the leading designer and retailer of maternity apparel in the United States with 893 stores in all 50 states, Puerto Rico and Canada. We operate our stores under the Motherhood, Mimi and A Pea in the Pod brands and also sell our merchandise on the Internet at our MaternityMall.com and brand-specific websites. Our stores include 132, primarily Motherhood-branded, leased departments within department and specialty stores. We were founded by Dan and Rebecca Matthias in 1982 as a mail order maternity apparel catalog. We began operating retail stores in 1985 and completed our initial public offering in 1993. We acquired Motherhood and A Pea in the Pod in 1995. In October 2001, we acquired iMaternity, which operated a total of 170 stores. We are currently consolidating the iMaternity operation into our own and have closed 71 of the stores. We anticipate closing an additional 21 stores within approximately six months.

Critical Accounting Policies and Estimates

        Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. These generally accepted accounting principles require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of net sales and expenses during the reporting period. Actual results could differ from those estimates.

        Our significant accounting policies are described in note 1 of the notes to consolidated financial statements for the fiscal year ended September 30, 2001. We believe that the following discussion addresses our critical accounting policies, which are those that are most important to the portrayal of our financial condition and results and require management's most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

        Inventories.    We value our inventories, which consist primarily of maternity apparel, at the lower of cost or market. Cost is determined on the first-in, first-out method and includes the cost of merchandise and freight. A periodic review of inventory quantities on hand is performed in order to determine if inventory is properly positioned at the lower of cost or market. Factors related to current inventories such as future consumer demand and fashion trends, current aging, current and anticipated retail markdowns or wholesale discounts, and class or type of inventory are analyzed to determine estimated net realizable values. A provision is recorded to reduce the cost of inventories to the estimated net realizable values, if required. Any significant unanticipated changes in the factors noted above could have a significant impact on the value of our inventories and our reported operating results.

        Long-Lived Assets.    Our long-lived assets consist principally of store leasehold improvements and are included in the "Property, Plant and Equipment, net" line item in our consolidated balance sheets included in this prospectus. These long-lived assets are recorded at cost and are amortized using the straight-line method over the lesser of the applicable store lease term or the estimated useful life of the leasehold improvements. The typical initial lease term for our stores is ten years.

        In assessing potential impairment of these assets, we will periodically evaluate the historical and forecasted operating results and cash flows on a store-by-store basis. Newly-opened stores may take

25



time to generate positive operating and cash flow results. Factors such as (i) store type, that is, company store or leased department, (ii) store concept, that is, Motherhood, Mimi or A Pea in the Pod, (iii) store location, for example, urban area versus suburb, (iv) current marketplace awareness of our brands, (v) local customer demographic data and (vi) current fashion trends are all considered in determining the time frame required for a store to achieve positive financial results. If economic conditions are substantially different from our expectations, the carrying value of certain of our long-lived assets may become impaired.

        Goodwill.    Our goodwill represents the excess of the cost over the fair value of net assets acquired in business combinations and is separately disclosed as "Goodwill" in our consolidated balance sheets included in this prospectus. In June 2001, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards, or SFAS, No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 requires that goodwill no longer be amortized, but instead be tested for impairment at least annually or as impairment indicators arise. Prior to our adoption of SFAS No. 142 on October 1, 2001, goodwill was amortized using the straight-line method over a period of 20 years.

        In assessing potential impairment, we have determined that we have one reporting unit for purposes of applying SFAS No. 142 based on our reporting structure. The fair value of our single reporting unit is determined based on the fair market value of our outstanding common stock on a control basis. If any significant unanticipated change in the fair value of our outstanding common stock on a control basis occurs, the carrying value of our goodwill may become impaired.

        Accounting for Income Taxes.    As part of the process of preparing our consolidated financial statements we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves us estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as depreciation of property and equipment and valuation of inventories, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheets. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income. Actual results could differ from this assessment if adequate taxable income is not generated in future periods. To the extent we believe that recovery is not more likely than not, we must establish a valuation allowance. To the extent we establish a valuation allowance or increase the allowance in a period, we must include an expense within the tax provision in the statement of operations.

        We have a valuation allowance of $1.9 million as of March 31, 2002, due to uncertainties related to our ability to utilize the net operating loss carryforwards of the acquired iMaternity business. In the future, if enough evidence of our ability to utilize the net operating loss carryforwards becomes apparent, we would be required to reverse our valuation allowance, resulting in a decrease in goodwill recorded in connection with our acquisition of iMaternity. On a quarterly basis, management evaluates and assesses the realizability of deferred tax assets and adjusts the valuation allowance if required.

26



Results of Operations

        The following table sets forth certain operating data as a percentage of net sales and as a percentage change for the periods indicated:

 
  Percentage of
Net Sales

   
 
 
  % Period to Period
Increase (Decrease)

 
 
  Six Months Ended
March 31,

 
 
  Six Months Ended
March 31, 2002

 
 
  2002
  2001
 
Net sales   100.0 % 100.0 % 14.4 %
Cost of goods sold   48.2   51.5   7.0  
   
 
     
Gross profit   51.8   48.5   22.2  
Selling, general and administrative expenses   46.2   45.0   17.4  
   
 
     
Operating income   5.6   3.5   83.9  
Interest expense   3.2   4.0   (9.0 )
   
 
     
Income (loss) before income taxes   2.4   (0.5 ) 639.8  
Income tax provision (benefit)   0.9   (0.2 ) 523.9  
   
 
     
Net income (loss)   1.5 % (0.3 )% 744.1  
   
 
     

        The following table sets forth certain information concerning the number of our stores and leased departments for the six months ended March 31, 2002 and 2001:

 
  2002
  2001
 
 
  Stores
  Leased
Departments

  Total
  Stores
  Leased
Departments

  Total
 
Beginning of period   639   132   771   592   111   703  
Acquired   170     170        
Opened   26   1   27   31   22   53  
Closed   (74 ) (1 ) (75 ) (5 )   (5 )
   
 
 
 
 
 
 
End of period   761   132   893   618   133   751  
   
 
 
 
 
 
 

Six Months Ended March 31, 2002 and 2001

        Net Sales.    Our net sales for the first six months of fiscal 2002 increased 14.4%, a $27.6 million increase, to $219.3 million, from $191.7 million for the first six months of fiscal 2001. The increase in sales resulted primarily from the incremental revenues generated by the new store locations opened in the last twelve months, including the acquired iMaternity stores. Comparable store sales for the six months ended March 31, 2002 increased by 0.3%, based on 679 locations, versus a decrease of 0.6%, based on 609 locations, for the six months ended March 31, 2001.

        Gross Profit.    Our gross profit for the first six months of fiscal 2002 increased 22.2%, a $20.6 million increase, to $113.6 million compared to $93.0 million for the first six months of fiscal 2001, due to increased sales and improved gross margin compared to last year. Gross profit as a percentage of net sales for the first six months of fiscal 2002 improved by 3.3 percentage points to 51.8% from 48.5% in the comparable period of fiscal 2001. The increase in gross margin versus last year primarily reflects the success of our product sourcing and inventory planning initiatives, which have enabled us to reduce our product costs.

        Selling, General and Administrative Expenses.    Our selling, general and administrative expenses for the first six months of fiscal 2002 increased by 17.4%, a $15.0 million increase, to $101.3 million, from

27



$86.2 million for the first six months of fiscal 2001. Compared to the first six months of fiscal 2001, store wages and related benefit costs increased by $5.3 million and store rent and related expenses increased by $6.8 million, primarily resulting from the stores added in the acquisition of iMaternity, as well as our own store openings since the beginning of fiscal 2001. As a percentage of net sales, operating expenses increased to 46.2% for the fiscal 2002 period compared to 45.0% for the fiscal 2001 period, primarily reflecting higher store operating expenses as a percent of net sales, partially offset by the elimination of goodwill amortization in fiscal 2002.

        Operating Income.    Our operating income increased by $5.6 million, an 83.9% increase, to $12.4 million in the first six months of fiscal 2002, compared to $6.7 million in the first six months of fiscal 2001, due to the higher sales volume and improved gross margin, partially offset by higher operating expenses. Operating income as a percentage of net sales for the first six months of fiscal 2002 increased to 5.6%, from 3.5% in the comparable period of fiscal 2001. The increase in operating income as a percentage of net sales is due to the improved gross margin.

        Interest Expense.    Our interest expense decreased by $0.7 million for the first six months of fiscal 2002 compared to the same period in fiscal 2001. We reduced our average borrowings under the credit facility by $2.4 million to $28.0 million for the six months ended March 31, 2002, from $30.4 million for the six months ended March 31, 2001. The effective interest rate on our borrowings under the credit facility decreased to 4.5% for the first six months of fiscal 2002, from 8.7% for the first six months of fiscal 2001, reflecting the decrease in the prime rate of interest and in LIBOR interest rates since the beginning of fiscal 2001.

        Income Taxes.    Our effective income tax rate was a provision of 37.2% for the first six months of fiscal 2002 compared to a benefit of 47.4% for the first six months of fiscal 2001. The change in the effective income tax rate was primarily due to the discontinuation of goodwill amortization in fiscal 2002.

Year Ended September 30, 2001 and 2000

        Net Sales.    Net sales for fiscal 2001 increased 6.0% to $388.3 million, from $366.3 million in fiscal 2000. The increase was primarily due to the 68 new stores we opened since September 30, 2000, net of store closings. Comparable store sales decreased by 2.4% during fiscal 2001, based on 600 locations, versus a comparable store sales increase of 8.3% during fiscal 2000, based on 532 locations. The decline in comparable store sales is primarily due to the difficult selling environment and the resulting lower consumer confidence, as further heightened by the tragic events that took place on September 11, 2001. As of September 30, 2001, we operated a total of 771 maternity locations: 523 Motherhood stores, 74 Mimi stores, 42 A Pea in the Pod stores and 132 leased maternity departments. In comparison, at September 30, 2000, we had 703 store locations: 480 Motherhood stores, 71 Mimi stores, 41 A Pea in the Pod stores and 111 leased maternity departments.

        Gross Profit.    Gross profit increased by $11.0 million, or 6.0%, to $194.0 million in fiscal 2001, primarily reflective of the higher sales volume. As a percentage of net sales, gross margins remained constant at 50.0%. During fiscal 2001, specific focus on product sourcing resulted in lower product costs. Additionally, we improved our delivery of products to our stores both in terms of time and cost, and reduced manufacturing costs by shifting from in-house cutting of fabric to lower cost outside contractors. Further, the benefits from newly automated warehousing systems served to reduce labor costs included in the overhead allocation pool, while increasing production volumes. The impact of these business changes were negatively affected by the tragic events of September 11th and as sales of our moderately-priced Motherhood products continued to outpace sales of our higher margin product lines.

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        Selling, General and Administrative Expenses.    Selling, general and administrative expenses increased by $15.0 million or 9.5% in fiscal 2001 compared to fiscal 2000. The increase in operating expenses was primarily due to an increase in wages and benefit related costs of $7.8 million and store rents of $3.7 million, which were in line with the new store expansions offset by a slight decrease in depreciation and amortization of $0.3 million. Operating expenses, as a percentage of net sales, increased from 43.1% to 44.5% principally due to the deleveraging impact of the negative comparable store sales decrease.

        Operating Income.    Operating income in fiscal 2001 was $21.2 million, 5.5% of net sales, compared to $25.2 million, 6.9% of net sales, in fiscal 2000. The decrease in operating income, as a percentage of net sales, was primarily due to negative comparable store sales.

        Interest Expense.    We reduced our interest expense by $1.0 million in fiscal 2001 from fiscal 2000 by maintaining average borrowings under our credit facility at levels below fiscal 2000 coupled with lower interest rates. Average borrowings and the corresponding effective interest rate was $26.4 million at 7.8% in fiscal 2001 compared to $33.7 million at 8.6% in fiscal 2000.

        Other Income.    During the fourth quarter of fiscal 2001, we negotiated buy-outs of two lease arrangements in connection with the planned closure of these stores. Due to the level of the rental rates, we recognized income from the proceeds being paid under these buy-out agreements of $1.2 million and wrote off related leasehold improvements and other costs of $0.6 million, resulting in a net gain of $0.6 million.

        Income Taxes.    Our effective tax rate increased to 50.0% in fiscal 2001 from 45.7% in fiscal 2000 primarily due to the relationship of non-deductible goodwill amortization to the lower pre-tax income in fiscal 2001. See note 10 of the notes to consolidated financial statements for the reconciliation of the statutory federal income tax rate to our effective tax rate.

Year Ended September 30, 2000 and 1999

        Net Sales.    Our 22.2% sales growth in fiscal 2000 compared to fiscal 1999 was attributable to our continued store expansion program and the 8.3% increase in comparable store sales. For fiscal 2000, comparable store sales increased by $23.3 million based on 532 locations versus a comparable store sales increase of $29.6 million, or 12.9%, during fiscal 1999 based on 473 locations. We opened 78 new stores during fiscal 2000, net of store closings. As of September 30, 2000, we operated a total of 703 maternity stores and leased departments: 480 Motherhood stores, 71 Mimi stores, 41 A Pea in the Pod stores and 111 leased maternity departments. In comparison, at September 30, 1999, we had 625 store locations: 416 Motherhood stores, 71 Mimi stores, 41 A Pea in the Pod stores and 97 leased maternity departments. Fiscal 1999 net sales also included the results from 30 Episode stores that were sold or closed by the end of the second quarter of fiscal 1999.

        Gross Profit.    Gross profit increased by $33.7 million, or 22.5%, to $183.0 million in fiscal 2000 primarily reflective of the higher sales volume. As a percentage of net sales, margins improved to 50.0% in fiscal 2000 compared to 49.8% in fiscal 1999. Improvements made to reduce vendor costs, tighten controls over managing inventory levels and lower shipping costs served to strengthen margins in fiscal 2000.

        Selling, General and Administrative Expenses.    Selling, general and administrative expenses increased by $30.4 million, or 23.9%, in fiscal 2000 compared to fiscal 1999. The increase in operating expenses was primarily due to an increase in wages and benefit related costs of $15.2 million, an increase in store rents of $5.6 million and an increase in depreciation and amortization of $1.3 million, all of which were in line with the new store expansions. Operating expenses as a percentage of net sales increased from 42.5% to 43.1% principally due to the higher store wages and related benefits.

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        Operating Income.    Operating income for fiscal 2000 improved to $25.2 million, or 6.9% of net sales, compared to $21.9 million, or 7.3% of net sales, in fiscal 1999. The increase of $3.3 million is primarily reflective of higher sales volume.

        Interest Expense.    Interest expense increased by $0.7 million in fiscal 2000 compared to fiscal 1999, reflecting higher average borrowings under our credit facility at a higher effective interest rate. Average borrowings and the corresponding effective interest rates were $33.7 million at 8.6% and $27.0 million at 7.7% in fiscal 2000 and 1999, respectively.

        Income Taxes.    Our effective tax rate decreased to 45.7% in fiscal 2000, from 50.3% in fiscal 1999. The reduction in the effective tax rate in fiscal 2000 was primarily due to the relationship of non-deductible goodwill amortization to the higher pre-tax income. See note 10 of the notes to consolidated financial statements for the reconciliation of the statutory federal income tax rate to our effective tax rate.

New Accounting Pronouncements

        In June 2001, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards No. 141, "Business Combinations," referred to as SFAS No. 141, and SFAS No. 142, "Goodwill and Other Intangible Assets," referred to as SFAS No. 142. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS No. 141 also specifies the criteria applicable to intangible assets acquired in a purchase method business combination to be recognized and reported apart from goodwill. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually. SFAS No. 142 further requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values and be reviewed for impairment. We adopted SFAS Nos. 141 and 142 effective October 1, 2001. In adopting SFAS No. 142, we no longer amortize goodwill.

        As of October 1, 2001, management determined that we had one reporting unit for purposes of applying SFAS No. 142, based on our reporting structure. We have made our initial assessment of impairment for the transition period as of October 1, 2001. The fair value of our single reporting unit was determined based on the then fair market value of our outstanding common stock on a control basis. Based on this initial assessment, no impairment loss was recognized. We plan to perform an annual assessment for goodwill impairment at the end of each fiscal year or as impairment indicators arise.

        In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 is effective for fiscal years beginning after June 15, 2002, and addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. Although early adoption is encouraged, we plan to adopt this statement in fiscal 2003. Adoption of SFAS No. 143 is not expected to have a material impact on our financial position or results of operations.

        In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which established a single accounting model, based on the framework established in SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of," and resolved significant implementation issues related to SFAS No. 121. SFAS No. 144 superceded SFAS No. 121 and Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations—Reporting the Effects of a Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS No. 144 is effective for financial statements issued for fiscal years beginning after December 14, 2001, and early adoption of the provision is encouraged. We plan to adopt this statement in fiscal 2003. Management believes that the

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adoption of SFAS No. 144 will not have a material impact on our financial position or results of operations.

Seasonality

        Our business, like that of certain other retailers, is seasonal. A significant portion of our net sales and profits are realized during the first and third fiscal quarters, corresponding to the holiday and spring selling seasons. Results for any quarter are not necessarily indicative of the results that may be achieved for a full fiscal year. Quarterly results may fluctuate materially depending upon, among other things, the timing of new store openings, net sales and profitability contributed by new stores, increases or decreases in comparable store sales, adverse weather conditions, shifts in the timing of certain holidays and promotions, and changes in our merchandise mix.

Inflation

        We do not believe that the relatively moderate levels of inflation which have been experienced in the United States in recent years have had a significant effect on our net sales or profitability. However, there can be no assurance that our business will not be affected by inflation in the future.

Liquidity and Capital Resources

        Our cash needs have been primarily for (i) debt service on our existing senior notes and our credit facility and (ii) capital expenditures, including furniture, new store buildouts, inventories to support additional locations and leasehold improvements, and equipment for our stores and corporate headquarters. We have historically financed these capital requirements from cash flows from operations and borrowings under our credit facility.

        Cash flows from operations increased by $3.4 million, to $12.3 million, for the first six months of fiscal 2002, from $9.0 million for the first six months of fiscal 2001. This increase was primarily the result of increased net income and increased cash generated by the reduction of inventory levels compared to the first six months of 2001. During the first six months of fiscal 2002, we utilized our cash flow from operations primarily to reduce our borrowings under the credit facility by $11.9 million, from $32.2 million at September 30, 2001, to $20.4 million at March 31, 2002. In addition, during the first six months of fiscal 2002, and immediately following the October 17, 2001 acquisition of iMaternity, we repaid approximately $8.9 million of debt assumed in the iMaternity acquisition with excess cash balances as of the acquisition date.

        For the first six months of fiscal 2002, we spent approximately $2.7 million on furniture, fixtures and leasehold improvements for new store facilities and improvements to existing stores and $0.5 million for corporate facility additions and other assets. In comparison, we spent $5.7 million on capital expenditures for the first six months of fiscal 2001. The reduction in capital expenditures primarily reflects a reduction in our net build out costs per new store.

        In fiscal 2001, our primary sources of cash were the $19.5 million of cash flows from operations and borrowings under our $60.0 million credit facility. During fiscal 2001, we spent $12.2 million in capital expenditures, including $10.1 million in furniture, fixtures and leasehold improvements for new store facilities, primarily Motherhood stores, and improvements to existing stores, as well as an additional $2.1 million for corporate additions and other assets. This compares to $13.6 million in capital expenditure spending for fiscal 2000, of which $12.1 million was for new and existing store facilities and $1.5 million was for corporate additions and other assets. As of September 30, 2001, our cash balance included $8.2 million of cash in the bank held in anticipation of paying down the iMaternity line of credit in conjunction with the acquisition, which was completed on October 17, 2001.

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        We have a $60.0 million credit facility, which includes a $56.0 million borrowing base revolving line of credit and approximately $4 million to support a special purpose letter of credit facility. In October 2001, the credit facility was amended and restated primarily to increase the collateral base to include the assets acquired in our purchase of iMaternity. The credit facility had been amended and restated in April 2000 to increase borrowings to the current level from $44.0 million, to raise the annual capital expenditure limitation and to extend the maturity of the facility until September 15, 2004. Interest on borrowings outstanding is currently based on the lender's prime rate or, at our election, an alternative rate of LIBOR plus 200 basis points for all or part of the direct borrowings outstanding. The blended rate for all borrowings under the credit facility at March 31, 2002 was approximately 4.0%. Amounts available for direct borrowings, net of letters of credit outstanding, are limited to the lesser of (a) the unused portion of the credit facility or (b) the aggregate adjusted availability as defined in the agreement as a percentage of eligible inventory and receivables. The credit facility is secured by a security interest in our inventory, equipment, fixtures and cash. There are no financial covenant requirements in the agreement unless the aggregate adjusted availability falls below $10.0 million. In such event, we would have to achieve minimum cash flow, as defined in the agreement, of not less than zero. During the first six months of fiscal 2002 and 2001, we exceeded the aggregate adjusted availability minimum. As of March 31, 2002, outstanding borrowings under the credit facility consisted of $20.4 million in direct borrowings and $2.8 million in letters of credit with available borrowings of $27.2 million, compared to $28.1 million of direct borrowings and $2.7 million in letters of credit with available borrowings of $17.3 million as of March 31, 2001. In addition to the direct borrowings, we have an outstanding $4.0 million standby letter of credit to collateralize an outstanding industrial revenue bond.

        On or about the closing date of the equity and debt offerings, we intend to enter into an amendment of the credit facility. The amendment will, among other things, modify the covenants to increase the annual capital expenditures limit to $30 million and permit acquisitions, capital stock repurchases and early redemptions of senior notes within specified limits. The amendment will add an unused facility fee of 10 basis points per annum.

        In 1995, we sold 125/8% Senior Unsecured Exchange Notes Due 2005 with a face amount of $92 million. The notes were issued at 97.934% of their face amount, resulting in an annual effective interest rate of 13.0%. Interest on the notes is payable semiannually in cash on February 1st and August 1st. The notes were issued by Mothers Work and are unconditionally guaranteed on a senior basis by our wholly-owned subsidiary. See note 6 of the notes to consolidated financial statements for the fiscal year ended September 30, 2001. The notes are redeemable at our option, in whole or in part, at any time after August 1, 2000, at 106.25% of their face amount plus accrued and unpaid interest, declining ratably to 100% of their face amount on and after August 1, 2002, plus accrued and unpaid interest. The notes impose certain limitations on our ability to, among other things, incur additional indebtedness, pay dividends and enter into certain types of transactions. The most restrictive of these covenants limits our ability to repurchase outstanding common stock or pay dividends.

        Our net proceeds from this debt offering will be approximately $120.7 million after deducting underwriting discounts and the estimated offering expenses payable by us. Concurrently with this debt offering, we are offering 1,100,000 shares of our common stock, which includes 100,000 shares being sold by selling stockholders, by means of a separate prospectus and registration statement. As described in "Use of Proceeds" above, we expect to use the proceeds from these offerings (i) to repay the existing 125/8% senior notes, plus accrued and unpaid interest, (ii) to repay our subordinated notes issued to former holders of shares of our Series A Preferred Stock in lieu of accrued and unpaid dividends, (iii) to pay all accrued and unpaid dividends on the outstanding shares of our Series A Preferred Stock and Series C Preferred Stock, (iv) to redeem all of the outstanding shares of our Series A Preferred Stock and to purchase, through an offer to purchase, all of the outstanding shares

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of our Series C Preferred Stock, (v) to repay the outstanding borrowings under our credit facility and (vi) for general corporate purposes.

        During fiscal 2001 and the six months ended March 31, 2002, certain shares of Series A Preferred Stock were converted at the election of the holders into shares of common stock at an initial conversion rate equal to ten shares of common stock for each share of Series A Preferred Stock, at a stated value of $3.7 million. Upon conversion, we are required to pay accrued and unpaid interest on the shares of Series A Preferred Stock being converted. However, we were restricted under the terms of our senior notes from paying cash dividends to the holders upon conversion. Accordingly, we issued approximately $2.4 million of subordinated notes with unpaid interest compounding annually at the prime rate until paid. The subordinated notes are convertible into common stock, in accordance with the note terms, after August 1, 2003. See note 7 of the notes to consolidated financial statements for the fiscal year ended September 30, 2001.

        Our management believes that our current cash and working capital positions, expected operating cash flows and available borrowing capacity under the credit facility will be sufficient to fund our working capital, capital expenditure and debt repayment requirements for the foreseeable future.

        We have entered into agreements that create contractual obligations and commercial commitments. These obligations and commitments will have an impact on future liquidity and the availability of capital resources. The tables set forth below present a summary of these obligations and commitments as of September 30, 2001.

Contractual Obligations:

 
  Payments Due by Period
Description

  Total
Obligations

  Less Than
One Year

  One to
Three Years

  Four to
Five Years

  After
Five Years

 
  (in thousands)

Long-term debt(1)   $ 96,334   $ 255   $ 879   $ 91,570   $ 3,630
Operating leases(2)     186,440     36,014     60,847     40,733     48,846
Capital lease obligations     279     179     100        
   
 
 
 
 
Total contractual cash obligations   $ 283,053   $ 36,448   $ 61,826   $ 132,303   $ 52,476
   
 
 
 
 

(1)
Includes debt discount of approximately $1.1 million on our existing senior notes.

(2)
Includes store operating leases, which generally provide for payment of direct operating costs in addition to rent. These obligation amounts include future minimum lease payments and exclude such direct operating costs.

Commercial Commitments(1):

 
  Amount of Commitment Per Period
Description

  Total
Obligations

  Less Than
One Year

  One to
Three Years

  Four to
Five Years

  After
Five Years

 
  (in thousands)

Credit facility(2)   $ 36,329   $ 36,329   $   $   $
Standby letters of credit     4,400     4,400            
   
 
 
 
 
Total commercial commitments   $ 40,729   $ 40,729   $   $   $
   
 
 
 
 

(1)
Excludes purchase orders for merchandise and supplies in the normal course of business which are liquidated within 12 months.
(2)
Includes $4.1 million of outstanding letter of credit commitments.

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Quantitative and Qualitative Disclosures About Market Risk

        The analysis below presents the sensitivity of the market value of our financial instruments to selected changes in market rates. The range of changes chosen reflects our view of changes that are reasonably possible over a one-year period. Our financial instruments consist principally of our debt portfolio. The market value of the debt portfolio is referred to below as the "debt value." We believe that the market risk exposure on other financial instruments is immaterial.

        At March 31, 2002, the principal components of our debt portfolio were the $92 million of 125/8% Senior Unsecured Exchange Notes Due 2005 and the $60.0 million credit facility, both of which are denominated in U.S. dollars. The notes bear interest at a fixed rate of 125/8%, and the credit facility bears interest at a variable rate which, at March 31, 2002, was approximately 4.0%. While a change in interest rates would not affect the interest incurred or cash flow related to the fixed portion of the debt portfolio, the fair value of the debt would be affected. A change in interest rates on the variable portion of the debt portfolio impacts the interest incurred and cash flows, but does not impact the value of the financial instrument.

        The sensitivity analysis as it relates to the fixed portion of our debt portfolio assumes an instantaneous 100 basis point move in interest rates from their levels at March 31, 2002 with all other variables held constant. A 100 basis point increase in market interest rates would result in a decrease in the value of the debt by $0.9 million at March 31, 2002. Conversely, a 100 basis point decline in market interest rates would cause the fair value of the debt to increase by $0.9 million at March 31, 2002.

        Based on the variable rate debt included in our debt portfolio at March 31, 2002, a 100 basis point increase in interest rates would result in an additional $0.1 million of interest incurred for the six month period. A 100 basis point decrease would correspondingly lower our interest expense for the six month period by $0.1 million.

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BUSINESS

General

        We are the leading designer and retailer of maternity apparel in the United States with 893 stores in all 50 states, Puerto Rico and Canada. We operate our stores under the Motherhood Maternity, Mimi Maternity and A Pea in the Pod brands and also sell our merchandise on the Internet at our MaternityMall.com and brand-specific websites. Our strategy is to fulfill all of an expectant mother's clothing needs, including casual and career wear, formal attire, underwear and outerwear in a high-service store environment. We use a vertically integrated business model to ensure that we offer the broadest assortment of in-stock, fashionable merchandise. Our three retail brands collectively target all of the price segments in maternity apparel, ranging from Motherhood at value prices to A Pea in the Pod at luxury prices. Our stores include 132 leased departments, primarily Motherhood-branded, within department and specialty stores. We have achieved 14.3% compounded annual sales growth over the past five years, resulting in sales of $388.3 million for the fiscal year ended September 30, 2001.

        We were founded by Dan and Rebecca Matthias in 1982 as a mail order maternity apparel catalog. We began operating retail stores in 1985 and completed our initial public offering in 1993. We acquired Motherhood and A Pea in the Pod in 1995 and iMaternity in October 2001 to increase our industry presence, address multiple price points in maternity apparel and improve operating productivity. Since the acquisitions of Motherhood and A Pea in the Pod, we have developed and grown these brands along with our Mimi brand. In connection with each of our acquisitions, we have consolidated some overlapping locations and closed under-performing stores, resulting in increased sales per square foot and better absorption of store overhead. In 1996, we acquired the Episode chain of women's apparel stores out of bankruptcy. In an effort to concentrate on our core maternity operations, we liquidated the Episode business in 1998 following two years of poor financial performance.

Retail Concepts

        Motherhood.    Motherhood serves the value-priced and highest volume portion of the maternity apparel industry and is our largest chain, with 610 stores as of March 31, 2002. Motherhood is positioned on everyday low prices, broad assortment, fashion and quality. We believe that the Motherhood customer shops at moderate-priced department stores and discount stores when she is not expecting. Motherhood stores average approximately 1,400 square feet and are located primarily in enclosed malls, strip and power centers and central city business districts. Motherhood stores include 87 outlet locations that carry predominantly Motherhood-branded product, as well as some closeout merchandise. In addition, we operate 128 Motherhood leased departments in department and specialty stores such as Macy's, Rich's, Lazarus and Babies "R" Us. Between 1998 and 2000, we successfully broadened Motherhood's customer base by lowering price points approximately 40% to 45%. This new price position significantly expanded the brand's target market, increased revenues per store and increased unit volumes.

        Mimi.    We have 109 Mimi stores, as of March 31, 2002, that serve the middle market price segment of the maternity apparel industry. The brand is positioned as young, contemporary, fun and affordable. We believe that the Mimi customer shops at department stores and specialty apparel chains when she is not expecting. Mimi stores average approximately 1,600 square feet and are located primarily in regional malls, lifestyle centers and central business districts. The stores carry Mimi-branded product, as well as a small selection of maternity merchandise developed by contemporary vendors exclusively for Mimi. We also operate ten Mimi leased departments, six of which have been opened after March 31, 2002, in Marshall Field's, Bloomingdale's and Macy's. Mimi was historically price positioned just below A Pea in the Pod. When Motherhood's prices were lowered, there was an opportunity for Mimi to broaden its customer base by including lower price points. Mimi was, therefore, recently repositioned and its merchandise price points now range from just above

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Motherhood to the lower end of A Pea in the Pod. This repositioning has resulted in an expansion of Mimi's target market, and we believe that we now have the opportunity to significantly increase the number of Mimi stores.

        A Pea in the Pod.    We believe that A Pea in the Pod is the premier maternity brand in the United States. The brand is positioned as exclusive, designer and aspirational. Our 42 stores, as of March 31, 2002, average approximately 2,400 square feet and are located in the most upscale venues, including Madison Avenue, Oak Street, Beverly Hills, South Coast Plaza and Bal Harbour. In addition to offering A Pea in the Pod and Mimi brands, we seek out designer and contemporary manufacturers and help them develop maternity versions of their styles exclusively for our A Pea in the Pod stores. Publicity, including celebrities wearing our clothes, is an important part of the marketing and positioning of the brand. As scarcity is part of the concept's luxury image, we have chosen to further develop the brand primarily by optimizing our customers' in-store experience rather than by opening new stores. We, therefore, continuously upgrade the quality of the locations, our store designs, the product styling and our publicity to enhance brand image and maximize profitability.

Our Competitive Strengths

        We are the leader in maternity apparel.    We are the only nationwide chain of maternity specialty stores in the United States and believe that our brands are the most recognized in maternity apparel. We have established a broad distribution network, with stores in a wide range of geographic areas and retailing venues. In addition, we believe that we have a leading position at every price point of maternity apparel through our three distinct brands. Our leadership position enables us to gain a unique understanding of the needs of our maternity customers, as well as keep abreast of fashion and product developments. We enhance our leadership position, increase market penetration and further build our brands by operating leased departments in department and baby specialty stores.

        We offer a wide product assortment.    A primary consideration for expectant mothers shopping for maternity clothes is product assortment, as pregnant women need to replace almost their entire wardrobe. We believe that we offer the widest selection of merchandise in the maternity apparel industry. We also offer product for multiple seasons, as pregnant women's clothing needs vary depending on their due date. Our ability to offer a broad assortment of product is due, in large part, to our vertically integrated business model, which includes our extensive in-house design and contract manufacturing capabilities, as well as our rapid inventory replenishment system. We believe that many of our competitors rely predominantly on the decreasing number of wholesale maternity apparel vendors who often offer more limited assortments.

        We are vertically integrated.    We design, contract manufacture and distribute approximately 90% of our merchandise. We believe that vertical integration enables us to offer the widest product selection in maternity apparel, to respond quickly to fashion trends and to ensure industry-leading in-stock levels. We combine our in-house design expertise, domestic and international sourcing capabilities, rapid inventory replenishment process and extensive proprietary systems to maximize inventory turnover, sales per square foot and gross profit margins. During the six months ended March 31, 2002, continuous improvements in our international sourcing capabilities have assisted us in improving inventory turnover and increasing gross margins by 3.3 percentage points as compared with the prior year period.

        We utilize a rapid inventory replenishment system.    Because maternity apparel is a niche industry, store profitability is optimized in smaller store formats. We are able to profitably offer a wide selection of merchandise in stores averaging approximately 1,500 square feet due, in large part, to our rapid inventory replenishment system. Our proprietary system enables us to offer more than 3,000 stock keeping units, or SKUs, per store without dedicating retail space to storage. We coordinate the rapid replenishment of inventory for all of our stores through our distribution center, which sends

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individually tailored selections to specific store locations between two and six times per week. We believe that most of our competitors do not rapidly replenish all styles in their store inventories and, therefore, cannot continuously offer comparable merchandise availability and assortment.

        We have proprietary systems that support our business.    In order to support our vertically integrated business model, we have developed a fully integrated, proprietary enterprise resource planning (ERP) system. This system includes point-of-sale (POS) systems, our TrendTrack merchandise analysis and planning system, our materials requirement planning (MRP) system and our web-based, global sourcing and logistics systems. These systems also support our automated picking and sorting systems and other aspects of our logistics infrastructure. We believe that our proprietary systems are critical to our competitive strengths of offering a broad product assortment, responding quickly to fashion trends, minimizing manufacturing costs and rapidly replenishing inventory in our stores.

        We are able to obtain prime real estate locations.    We believe that we are able to obtain attractive real estate locations due to the brand awareness of our concepts, our multiple price point approach and our sought after maternity customer. We are the only maternity apparel retailer to provide mall operators with the ability to choose from three differently priced concepts, depending on the mall's target demographics. We are also able to provide multiple stores for malls that want to offer their maternity customers a range of price alternatives. In addition, in the case of multi-mall operators, we have the flexibility to supply packages of stores in multiple malls. As a result, we have been able to locate stores in many of what we believe are the most desirable shopping malls in the country and are able to obtain attractive locations within these malls.

        We have a highly experienced and recently expanded management team.    Dan Matthias, Chairman and Chief Executive Officer, and Rebecca Matthias, President and Chief Operating Officer, founded the company 20 years ago and are leaders in maternity apparel retailing. David Mangini joined our management team in August 2001 as Executive Vice President — General Merchandise Manager with more than 20 years of apparel merchandising experience, including senior positions at Gap Inc. and Limited Brands, Inc. Mr. Mangini has developed a merchandising and planning organization by brand to further support each concept's future growth.

Our Growth Strategy

        We intend to continue growing our business primarily by opening new Motherhood and Mimi locations and improving profit margins. We expect to finance our growth principally from internally generated cash flow.

        Continue to grow our Motherhood store base.    We have grown our Motherhood store base from 217 stores at the time of acquisition in 1995 to 610 stores as of March 31, 2002, excluding leased departments. In fiscal 2000 and 2001, we opened 64 and 43 Motherhood stores, respectively, excluding leased departments and net of store closings. Based on our internal research and the number of suitable malls and outlet centers without a Motherhood store, we believe that the maternity apparel industry can support approximately 450 additional Motherhood stores and 100 additional Motherhood outlet stores in the United States. We expect to open approximately 99 and 67 new Motherhood stores and outlets in fiscal 2002 and 2003, respectively, net of store closings. We expect that the Motherhood stores opened in fiscal 2002 will include 54 conversions from acquired iMaternity locations. We currently have five Motherhood stores in Canada and believe that we can open additional stores in Canada, as well as in other international locations. We may also have the opportunity to grow the number of our Motherhood leased departments in the United States.

        Accelerate the growth of our Mimi store base.    We have 109 Mimi stores as of March 31, 2002, excluding leased departments. In fiscal 2000, we did not open any Mimi stores, net of store closings. In fiscal 2001, we opened three Mimi stores, excluding leased departments and net of store closings. We

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have recently widened the range of price points offered at Mimi to include lower prices and believe that this repositioning has significantly expanded Mimi's potential customer base. As a result, we expect to accelerate the growth of Mimi stores. Based on our internal research and the estimated number of suitable locations, we believe that the maternity apparel industry can support approximately 200 additional Mimi stores in the United States. We plan to open approximately 33 and 28 Mimi stores in fiscal 2002 and 2003, respectively, excluding leased departments and net of store closings. We expect that the Mimi stores opened in fiscal 2002 will include 25 conversions from acquired iMaternity locations.

        Increase our gross and operating margins.    We expect to increase our gross and operating margins primarily by continuing to develop our international sourcing capabilities. We have been transitioning from domestic to international manufacturing and believe that there are still significant opportunities to continue to lower our cost of goods. These opportunities include: (i) increasing volume purchasing as our business grows; (ii) improving supply chain efficiencies and communication with suppliers; (iii) shifting more of our domestic production to international factories; and (iv) identifying new manufacturers in additional and existing countries to minimize costs. We expect to continue to domestically source a portion of our product in order to quickly respond to changing fashion demands. We also expect that current initiatives to enhance the fashion apparel selection at Motherhood and Mimi will improve margins by increasing product demand and reducing markdowns.

        Expand and remodel our stores.    Approximately 25% of our non-outlet Motherhood stores are too small to carry our full line of merchandise, including plus-sized maternity wear, as well as our entire assortment of nursing apparel and accessories. We plan to expand the size of these stores primarily by relocating them within their current malls as space becomes available. Since the beginning of fiscal 1999, we have expanded 41 stores by increasing their average square footage from approximately 950 square feet to approximately 1,850 square feet. Recent results from completed relocations and expansions indicate that enlarging undersized Motherhood stores has increased their sales and profits. There are also opportunities to expand a portion of our Mimi store base to improve sales and profits. In addition, we plan to accelerate our store remodeling efforts and expect to remodel a substantial portion of our stores over the next several years.

        Improve new store return on investment.    We have recently redesigned the new store prototypes for each of our concepts to reduce build-out costs and improve returns on investment. The new prototypes are very similar to our current store base, but use more of a location's existing conditions and more prefabrication during construction. As a result, we have substantially reduced the capital expenditures needed for an average new store and expect to significantly increase our returns on new store investments.

        Leverage our unique customer relationships.    We believe that we serve approximately 2.5 million of the approximately 4.0 million women who have babies in the United States each year. We also believe that we serve approximately 1.3 million of the approximately 1.6 million first time mothers each year. As a result, we have developed an extensive customer file of mothers. We have an opportunity to leverage these relationships by offering, at our customers' election, additional baby-related products and services through new and existing strategic alliances. We are supporting these efforts, as well as improving our customer service and customer relationship management capabilities, with investments in database hardware and software.

The Maternity Apparel Industry

        We are unaware of any data on the size of the maternity apparel industry. However, based on our own analysis, including estimates of the number of each competitor's locations and volume per location, we believe there are approximately $1 billion of maternity clothes sold each year in the United States. We also believe that there is an opportunity to grow the market by selling maternity clothes to

38



pregnant women who currently purchase loose-fitting or larger-sized non-maternity clothing as a substitute for maternity wear. We also believe that the market can grow by reducing the amount of "hand-me-down" and "borrowing" associated with maternity apparel. This opportunity is particularly relevant in the value-priced segment where low-priced, fashionable apparel could provide an economical alternative to secondhand maternity wear. In addition, we believe that demand for maternity apparel is relatively stable when compared to non-maternity apparel. Expectant mothers continue to need to replace their clothes and the current rate of approximately four million U.S. births per year has remained stable over the last decade. We believe that maternity apparel is also less fashion sensitive than specialty apparel in general, as demand is driven by the need to replace wardrobe basics as opposed to current fashion trends.

Brands

        We operate our maternity stores under three concepts offering a full range of casual and career wear, formal attire, underwear and outerwear. We have positioned our three brands to target the entire spectrum of pregnant women, serving a smaller customer base at the highest price points and broadening the market as the price points are reduced. The following table sets forth certain information regarding our portfolio of stores as of March 31, 2002, including each store concept's target location, brand positioning, price range for dresses and average store size:

Brand
  Description of
Target Location

  Brand Positioning
  Dress Price
Range

  Average
Store Size
(square feet)

Motherhood   Moderate regional malls and department stores   Broad assortment, fashion, quality and everyday low price   $19-$49   1,400

Mimi

 

Mid-priced regional malls and lifestyle centers

 

Young, contemporary, fun and affordable

 

$40-$168

 

1,600

A Pea in the Pod

 

Exclusive, high-end regional malls and affluent residential areas

 

Exclusive, designer and aspirational

 

$150-$450

 

2,400

        Major regional malls with several department stores and a wide range of price points may be able to accommodate more than one maternity store. We have the ability to address multiple price alternatives at a given mall, with Motherhood as our value-oriented brand, Mimi as our mid-priced brand and A Pea in the Pod as our luxury brand. As of March 31, 2002, we had multiple stores in 62 major regional malls.

Internet Operations

        We believe that many pregnant women turn to the Internet for maternity-related information and products, including on-line purchases of maternity clothes. Our websites are, therefore, important for educating existing and potential customers about our brands and driving traffic to our stores. Our websites profitably sell merchandise and provide store location information. Each of our concepts has its own dedicated website that is reached primarily through the brand name, for example motherhood.com. Our content site and portal, MaternityMall.com, is another likely way for a consumer to reach one of our brand-specific websites. In addition to providing links to all of our websites, MaternityMall.com contains maternity advice and information, related baby product information and editorial content. We also operate the iMaternity.com website, which is currently featured on iVillage.com and sells Motherhood merchandise. The replenishment capabilities of our distribution center enable us to incorporate Internet fulfillment into our existing operations.

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Brand-Specific Operations Teams

        We are organized primarily along functional lines, such as merchandising, store operations, design and production, to obtain maximum efficiencies. Since our business consists of three separate brands requiring decisions on a brand-specific basis, we have recently built teams by brand where the functional leaders for each brand work together. Each brand team is led by the head merchant and includes the director of stores for that brand, the head designer, the head planner and the key production manager. These teams also include visual, fabric purchasing and other necessary professionals. All senior members of each brand team are eligible for a bonus based on the cash flow target for that brand.

Store Operations

        We believe that the typical maternity customer, especially the first-time mother, seeks more advice and assistance than the typical non-maternity customer. Therefore, we aim to employ skilled, motivated sales associates who are trained to provide the high level of service and reassurance needed by our customers. We attempt to provide a boutique level of attentive service that differentiates us, particularly from our moderate and discount store competitors. Our centralized merchandising and store operations also enable our store associates to focus primarily on selling and maintaining the appearance of the stores. In addition, visual merchants coordinate with the merchandising department to develop space allocation plans, design store display windows and define and enhance the product presentation.

        Each of our three store brands has a director of stores. At Motherhood and Mimi, the management reporting chain consists of regional managers, district managers and store managers. At A Pea in the Pod, due to its smaller number of stores, the district managers report to the director of stores. Our store, district and regional managers receive incentive-based compensation related to store-level performance.

Merchandising, Design and Inventory Planning

        Merchandising.    We strive to maintain an appropriate balance between new merchandise and proven styles, as well as between basic and fashion items. Our merchandising decisions are based on current fashion trends, as well as input from our designers and outside vendors. This information is used in conjunction with the item-specific sales data provided by our proprietary merchandising and replenishment system. Each brand has its own team of merchants, designers and planners. These teams are led by the head merchant of the brand, except for Motherhood, which is led by the division President. The head merchants and the President of Motherhood report to David Mangini, Executive Vice President — General Merchandise Manager.

        Design.    Our design department creates and produces samples and patterns for our manufactured products under the guidance of the merchandising department. This capability differentiates us from many of our competitors, who source their products from a limited number of maternity wear vendors. The design of our products begins with a review of European and New York runway trends, current non-maternity retail trends, fashion reporting service slides and fabric samples. The designers review our best selling items from prior seasons and integrate current fashion ideas from the non-maternity apparel segment.

        Inventory Planning and Allocation.    Our planning and allocation department is responsible for planning future inventory purchases and markdowns, as well as targeting overall inventory levels and turnover. We establish target inventories for each store using our inventory planning system with the goals of optimizing our merchandise assortment and turnover, maintaining adequate depth of merchandise by style and managing close-out and end-of-season merchandise consolidation. Our proprietary capabilities enable us to continually monitor and respond more quickly to consumer

40



demand and are integral to our inventory management program. These capabilities are facilitated by our TrendTrack system, which provides daily product sell-through data and merchandising information.

Production and Distribution

        We design and manage the production for approximately 90% of our merchandise. We contract our sewing to factories throughout the world, including domestic facilities, and we continue to seek additional contractors for our sourcing needs. No individual contractor represents a material portion of our sewing. A majority of our merchandise is purchased "full package," as finished products made to our specifications, typically utilizing our patterns, markers and designs. Fabric, trim and other supplies are obtained from a variety of sources. As we have expanded our stores and increased volumes, we have been able to obtain products at a lower cost per unit, thereby increasing gross margins.

        Our production and quality assurance personnel monitor production at contractor facilities in the United States and work with our agents abroad to ensure quality control, compliance with our design specifications and timely delivery of finished goods. This quality control effort is enhanced by our world-wide Internet-based contracting and logistics systems, which include advanced features such as measurement specifications and digital photography. We also use a consultant to monitor working conditions at our contractors' facilities on a worldwide basis.

        Finished garments from contractors and other manufacturers are received at our distribution facility in Philadelphia, Pennsylvania, where they are inspected using statistical sampling methods and stored for picking. Our distribution facility utilizes the latest fulfillment technology to serve as a replenishment center, as opposed to solely a distribution center. The facility sends an individually tailored selection from our approximately 25,000 SKUs to any of our locations two to six times per week. Store replenishment decisions are made automatically based upon target inventories established by the allocation department and individual store sales data. Shipments from the distribution facility use several automated systems, including our pick-to-light system for flat-packed goods and our hanging garment sortation system, which speed deliveries and reduce costs.

        Shipments to stores are tracked by our proprietary delivery tracking software. Freight routed through zone-skipping, over-the-road carriers running 24 hours per day and delivered locally by a variety of local carriers is supplemented by a small percentage of second day air, providing one to three day delivery throughout the United States.

Management Information and Control Systems

        We believe that our proprietary systems are instrumental to our ability to offer the broadest assortment of maternity merchandise and accomplish rapid replenishment of inventory. We continuously develop, maintain and upgrade our systems and currently employ 15 programmers. Our stores have point-of-sale terminals that provide information used in our customized TrendTrack merchandise analysis and planning system. This system provides daily financial and merchandising information that is integral to monitoring trends and making merchandising decisions. The TrendTrack system has numerous features designed to integrate our retail operations with our design, manufacturing and financial functions. These features include custom merchandise profiles for each store, daily inventory replenishment, item-tracking providing daily updated selling information for every style, classification open-to-buy and inventory control, as well as the daily collection of credit card sales data.

        As part of our proprietary ERP system, we employ a comprehensive MRP system to manage our production inventories, documentation, work orders and scheduling. This system provides a perpetual inventory of raw materials, actual job costing, scheduling and bill of materials capabilities. The foundation of our ERP system is a perpetual inventory of finished goods by location across all of our retail stores which interfaces directly with our distribution facility.

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        We have recently begun the deployment of a proprietary, upgraded point-of-sale system. This Internet-based system provides real-time access to financial and merchandising information in addition to rapid credit authorization. We believe that this new system will significantly reduce the amount of training required for new sales associates and store managers. In addition, we anticipate that the system will improve our customer relationship management capabilities by allowing the creation of customized promotional and marketing strategies. The rollout of this system to stores is scheduled to continue through fiscal 2003.

        Given the importance of our management information systems, we have taken extensive measures to ensure their responsiveness and security. Our hardware and communications systems are based on a redundant and multiprocessing architecture, which allows their continued operation on a parallel system in the event that there is a disruption within the primary system. Our main computer system, located in our Philadelphia facility, is duplicated by a fully mirrored system in a separate part of the building which can assume full operations. In addition, our software programs and data are backed up and stored off-site. Our communications links come from two telephone frame rooms, are delivered through feeds under two streets and are further backed up by microwave links.

Pricing

        Each of our brands targets customers in different price segments of the maternity apparel industry. Our Motherhood brand is positioned primarily on everyday low prices, Mimi employs middle-market pricing and A Pea in the Pod employs luxury pricing. None of our concepts use point-of-sale high/low promotional strategies to drive traffic into the stores. Our price reductions are permanent and are used to accelerate the sale of slower selling merchandise. Merchandise that is selling slowly is quickly marked down, moved to another store where the item is selling faster or moved to a Motherhood outlet store.

Advertising and Marketing

        We believe that the power of our brands, customer referrals and our convenient mall locations drive traffic into our stores. Therefore, we have modest advertising and marketing expenditures. Our advertising and publicity efforts include in-store marketing, prenatal consumer-targeted advertising and our Internet websites. We also run full-page ads for all of our brands in pregnancy-targeted publications, as well as prenatal issues of leading baby magazines. We advertise in several key prenatal magazines, including American Baby, Pregnancy and Shape Fit Pregnancy. A Pea in the Pod and Mimi are also advertised in fashion magazines, such as Vogue and In Style. In addition, we produce and distribute maternity brochures quarterly to obstetric and gynecological offices, as well as to customers, doctors' offices and hospitals upon request. Certain initiatives that we began in fiscal 2000 to drive editorial coverage in magazines, TV and newsprint were focused initially on A Pea in the Pod and have recently been expanded to include Motherhood and Mimi.

Competition

        Our business is highly competitive. The following are several important factors in competing successfully in the retail industry: breadth of selection in sizes; colors and styles of merchandise; product procurement and pricing; ability to anticipate fashion trends and customer preferences; inventory control; reputation; quality of merchandise; store design and location; and advertising and customer service. We face competition in our maternity apparel lines from various sources, including department stores, specialty retail chains, discount stores, independent retail stores and catalog and Internet-based retailers. In the value-priced maternity apparel business, we face competition from retailers such as JCPenney, Kmart, Kohl's, Target, Sears and Wal-Mart, as well as web-based maternity operations, including those of Gap and Old Navy which also currently offer a selection of maternity clothes in two stores. Many of these competitors are larger and have significantly greater financial

42



resources than us. Our mid- and luxury-priced merchandise faces a highly fragmented competitive landscape that includes locally-based, single unit retailers, as well as a handful of multi-unit maternity operations, none of which have more than twelve stores.

Employees

        At June 30, 2002, we had 2,441 full-time and 2,240 part-time employees. None of our employees are covered by a collective bargaining agreement. We consider our employee relations to be good.

Trademarks

        We own trademark and service mark rights that we believe that are sufficient to conduct our business as currently operated. We own several trademarks, including Mothers Work®, A Pea in the Pod®, Mimi Maternity®, Motherhood®, Motherhood Maternity Outlet®, Steena® and MaternityMall.com®. As a result of the iMaternity acquisition, we also own iMaternity™, Dan Howard™, Mothertime™ and iMaternity.com™ marks. Additionally, we own the marks Real Time Retailing®, What's Showing is Your Style®, Motherhood is Everything Good...™ and Maternity Redefined®. We are not aware of any pending claims of infringement or other challenges to our rights to use our marks as currently used by us.

Properties

        We own our principal executive offices and distribution facility, which is located at 456 North Fifth Street, Philadelphia, Pennsylvania 19123. This facility consists of approximately 312,000 square feet, of which 32,000 square feet is dedicated to office space and the remaining square footage to warehousing and distribution. Our current lease for fabric facility space located at 10430 Drummond Road, Philadelphia, Pennsylvania 19152 expires on November 30, 2002. We have entered into a letter of intent for a 10-year lease of a facility located at 2001 Kitty Hawk Avenue, Philadelphia, Pennsylvania in the Philadelphia Naval Business Center. This facility consists of approximately 64,000 square feet of warehouse and office space. We believe that this facility, together with our existing distribution facility, will be adequate to support our anticipated distribution needs over the next few years. Our facilities are subject to state and local regulations that range from building codes to health and safety.

        We lease our store premises for terms averaging from seven to ten years. Certain leases allow us to terminate our obligations in the event that the applicable store does not achieve a specified sales volume. Some of these leases also provide for contingent payments based on sales volume and other leases contain clauses for escalations of the base rent, as well as increases in operating costs, marketing costs and real estate taxes.

        As of September 30, 2001, the following number of store leases, excluding leased departments, are set to expire as listed in the table below. We do not expect the expiration of any leases to have a materially adverse impact on our business or operations.

Fiscal Year
Leases Expire

  Number
of Stores

  2002   52
  2003   63
  2004   103
  2005   60
  2006 and later   361

        In addition, we have arrangements with department and specialty stores, including Bloomingdale's, Lazarus, Marshall Field's, Macy's, Rich's and Babies "R" Us to lease maternity departments in their stores. These leased departments typically involve the lease partner collecting all of the revenue from the leased department and remitting all but a fixed percentage to us. In most of the arrangements, we provide staffing for the leased departments.

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        As of March 31, 2002, we have retail stores in the following locations:

Location

  Motherhood(1)
  Mimi
  A Pea in
the Pod

  Leased
Departments

  Total
Alabama   5   2   0   1   8
Alaska   1   0   0   0   1
Arizona   10   1   1   1   13
Arkansas   2   0   0   0   2
California   71   8   7   0   86
Colorado   9   2   1   2   14
Connecticut   12   4   0   1   17
Delaware   3   1   0   2   6
District of Columbia   0   1   0   0   1
Florida   43   4   5   12   64
Georgia   20   6   1   11   38
Hawaii   2   0   0   0   2
Idaho   2   0   0   0   2
Illinois   29   8   3   5   45
Indiana   14   1   0   3   18
Iowa   4   0   0   0   4
Kansas   5   2   0   1   8
Kentucky   5   1   0   2   8
Louisiana   8   1   0   3   12
Maine   2   0   0   1   3
Maryland   16   3   0   3   22
Massachusetts   19   3   2   7   31
Michigan   19   5   1   1   26
Minnesota   9   0   1   2   12
Mississippi   4   0   0   0   4
Missouri   10   3   0   1   14
Montana   1   0   0   0   1
Nebraska   3   1   0   0   4
Nevada   6   0   1   0   7
New Hampshire   5   0   0   2   7
New Jersey   21   6   2   17   46
New Mexico   2   0   0   0   2
New York   37   8   3   13   61
North Carolina   17   4   2   2   25
North Dakota   1   0   0   0   1
Ohio   23   4   1   12   40
Oklahoma   5   2   0   1   8
Oregon   6   1   0   0   7
Pennsylvania   31   6   2   6   45
Rhode Island   1   1   0   1   3
South Carolina   6   1   0   1   8
South Dakota   2   0   0   0   2
Tennessee   12   3   0   4   19
Texas   53   10   6   8   77
Utah   7   1   0   0   8
Vermont   1   0   0   0   1
Virginia   18   2   2   5   27
Washington   9   1   1   0   11
West Virginia   1   0   0   1   2
Wisconsin   6   1   0   0   7
Wyoming   1   0   0   0   1
Puerto Rico   6   1   0   0   7
Alberta   1   0   0   0   1
Ontario   3   0   0   0   3
Quebec   1   0   0   0   1
   
 
 
 
 
  Total   610   109   42   132   893
   
 
 
 
 

(1)
Includes 87 outlet stores.

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iMaternity Acquisition

        On October 17, 2001, we acquired iMaternity. At the time of the acquisition, iMaternity operated a total of 170 Dan Howard and Mothertime maternity clothing stores, including some under the trade name iMaternity, as well as the iMaternity.com website. We are currently consolidating iMaternity into our operations. Through March 31, 2002, we closed 71 of the 170 iMaternity stores, consolidated the iMaternity field sales organization with our own and closed the iMaternity headquarters, manufacturing facilities and Internet development center. We have also converted the remaining iMaternity stores to either Motherhood or Mimi locations. As of March 31, 2002, we anticipated closing 21 of these converted stores within approximately the next six months, 19 of which have been closed as of the date of this prospectus. The timing of the store closings depends primarily on our ability to negotiate and complete lease terminations.

Legal Proceedings

        Following the closing of the iMaternity acquisition, iMaternity vendors made claims for amounts owed by iMaternity that had not been disclosed to us by the sellers prior to the closing. We are currently investigating these claims. If we have liability for these undisclosed amounts, we have the right to seek indemnification from the sellers. If we were to prevail in an indemnification claim, we could reduce the number of outstanding shares of the Series C Preferred Stock issued to the sellers, or, if the sellers no longer hold shares of our Series C Preferred Stock, receive cash damages. We have recorded $1.7 million of accounts payable, which we believe represents a reasonable estimate of our potential liability for these vendor claims.

        From time to time, we are named as a defendant in legal actions arising from our normal business activities. Although the amount of any liability that could arise with respect to currently pending actions of this nature cannot be accurately predicted, in our opinion, no liability for any pending action will have a material adverse effect on our financial position.

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MANAGEMENT

Directors and Executive Officers

        The following table sets forth the name, age and position of each of our directors and executive officers:

Name

  Age
  Position
Dan W. Matthias   58   Chairman of the Board and Chief Executive Officer
Rebecca C. Matthias   49   President, Chief Operating Officer and Director
David Mangini   57   Executive Vice President — General Merchandise Manager
Edward M. Krell   39   Senior Vice President — Chief Financial Officer
Joseph A. Goldblum   52   Director
Elam M. Hitchner, III   55   Director
David Schlessinger   46   Director
Stanley C. Tuttleman   83   Director
William A. Schwartz, Jr.   63   Director

        Dan W. Matthias founded Mothers Work in 1982 and has served as Chairman of the Board since our inception. From 1983 to 1993, he served as our Executive Vice President, and since January 1993, Mr. Matthias has been our Chief Executive Officer. Prior to Mothers Work, Mr. Matthias had been involved in the computer and electronics industry, serving as a director of Zilog, Inc. and as the President of a division of a subsidiary of Exxon Corporation.

        Rebecca C. Matthias founded Mothers Work in 1982 and has served as a director and our President since our inception. Since January 1993, Ms. Matthias has served as our Chief Operating Officer. In 1992, she was chosen as "Regional Entrepreneur of the Year" by Inc. magazine and Merrill Lynch Corporation. Prior to 1982, she was a construction engineer for the Gilbane Building Company. Ms. Matthias also serves as a member of the Board of Trustees of Drexel University.

        David Mangini has served as Executive Vice President — General Merchandise Manager since August 2001. Prior to joining Mothers Work, Mr. Mangini served as Today's Man's Chief Merchandising Officer from 1999 to 2000. From 1998 to 1999, Mr. Mangini served as Chief Operating Officer of Gadzooks. From 1987 to 1997, Mr. Mangini was an officer at Limited, Inc., including President and Chief Executive Officer of its Structure brand.

        Edward M. Krell has served as Senior Vice President — Chief Financial Officer since January 2002. Prior to joining Mothers Work, Mr. Krell served as Executive Vice President & Chief Financial Officer of Mammoth Sports Group, Inc., an Internet and catalog retailer of golf equipment and accessories from December 1999 to July 2000 and as an independent financial consultant from July 2000 to January 2002. From 1995 to 1999, Mr. Krell served as Executive Vice President and Chief Financial Officer at London Fog Industries, Inc., a wholesale and retail distributor of rainwear and outerwear. Mr. Krell began his career as an investment banker with Kidder, Peabody & Co. Incorporated.

        Joseph A. Goldblum has served as a director since 1989. Mr. Goldblum has been President of G-II Equity Investors, Inc., a general partner of G-II Family Partnership L.P. since May 1989. He was also Of Counsel with the law firm of Goldblum & Hess from May 1989 to December 1996.

        Elam M. Hitchner, III has served as a director since January 1994. Mr. Hitchner was a partner in the law firm Pepper Hamilton LLP, in Philadelphia, Pennsylvania, which provides legal services to us, from May 1992 to June 1999, and returned to the firm in January 2001. From July 1999 until December 31, 2000, Mr. Hitchner was a general partner of Meridian Venture Partners and Meridian Venture Partners II, venture capital firms located in Radnor, Pennsylvania.

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        David Schlessinger has served as a director since 2002. He founded Encore Books, a retail bookstore chain, in 1973 and served as its Chairman and Chief Executive Officer until 1986. Mr. Schlessinger founded Zany Brainy, Inc., a retail children's educational products company, in 1991. He served as Zany Brainy's Chief Executive Officer until 1996 and as its Chairman until 1998. Since 1998, he has been engaged in personal business and investment activities as well as consulting and board services with private companies.

        Stanley C. Tuttleman has served as a director since January 2000. He has been the President and Chief Executive Officer of Tuttson Capital Corp., a financial services corporation, since 1983. Mr. Tuttleman also serves as Chief Executive Officer and Chairman of Telepartners, Inc., a wireless program company.

        William A. Schwartz, Jr.    has served as a director since August 1998. Mr. Schwartz is President and Chief Executive Officer of U.S. Vision, Inc., a retailer of optical products and services, a position which he has held since 1995. Mr. Schwartz currently is a director of U.S. Vision, Inc. and Commerce Bancorp, an affiliate of Commerce Capital Investments, Inc., an underwriter of our concurrent equity offering.

        Our executive officers are elected annually by the Board of Directors and serve at the discretion of the Board. Other than the husband and wife relationship between Dan and Rebecca Matthias, there are no family relationships among any of our other executive officers.

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PRINCIPAL STOCKHOLDERS

Principal Stockholders

        The following table sets forth information, as of July 15, 2002, except as otherwise noted, with respect to the beneficial ownership of shares of common stock and Series C Preferred Stock by:

        Unless otherwise indicated, each person has sole voting power and sole investment power, except to the extent their power may be shared with a spouse.

 
  Common Stock
  Series C Cumulative
Preferred Stock(b)

   
 
Name and Address of Beneficial Owner(a)

  Amount and
Nature of
Beneficial
Ownership

  Percent
of
Class

  Amount and
Nature of
Beneficial
Ownership

  Percent
of Class
Outstanding

  Percent
of Voting
Power

 
Dan W. and Rebecca C. Matthias   911,730 (c) 20.9 %     19.6 %
Joseph A. Goldblum   162,219 (d) 4.1 %     3.8 %
Elam M. Hitchner, III   58,500 (e) 1.5 %     1.4 %
Edward M. Krell   32 (f) *           *  
David Mangini   10,000 (g) *           *  
David Schlessinger   2,000 (h) *           *  
William A. Schwartz, Jr.   8,000 (i) *       *  
Stanley C. Tuttleman   31,000 (j) *       *  
Centre Capital Investors III, L.P.
c/o Centre Partners Management LLC
30 Rockefeller Center Suite 1050
New York, NY 10020
  131,128 (k) 3.3 % 127,912   42.3 % 6.1 %
Centre Capital Tax-Exempt Investors III, L.P.
c/o Centre Partners Management LLC
30 Rockefeller Center Suite 1050
New York, NY 10020
  18,172 (k) *   17,726   5.9 % *  
James R. Kirsch
133 Laurel Avenue
Highland Park, IL 60035
  43,886 (k) 1.1 % 33,080   10.9 % 1.8 %
William S. Kirsch
c/o Kirkland & Ellis
200 East Randolph Drive
Chicago, IL 60601
  43,886 (k) 1.1 % 33,080   10.9 % 1.8 %
Daniel S. Kirsch, as Trustee of The Daniel S. Kirsch Trust, dated October 8, 1996
2225 Tennyson
Highland Park, IL 60035
 
83,729

(k)

2.1

%

63,113
 
20.9

%

3.5

%
Dimensional Fund Advisors, Inc.
1299 Ocean Avenue 11th Floor
Santa Monica, CA 90401
  278,900 (l) 7.1 %     6.6 %
Foremark Investments, Ltd.
c/o Madeline Wong
21 South End Avenue Penthouse 1C
New York, NY 10280
  217,365 (m) 5.5 %     5.1 %
MVP Distribution Partners
259 Radnor-Chester Rd.
Radnor, PA 19087
  374,645 (n) 9.5 %     8.9 %
Oakmont Capital, Inc.
112 St. Clair Avenue West Suite 504
Ontario, Canada M4V 2Y3
  259,000 (o) 6.6 %     6.1 %
All directors and officers as a group (9 persons)   1,183,475 (p) 26.8 %     25.1 %

*
Less than 1% of the outstanding common stock or less than 1% of the voting power.

48


(a)
Except as otherwise indicated, the address of each person named in the table is: c/o Mothers Work, Inc., 456 North Fifth Street, Philadelphia, Pennsylvania 19123.

(b)
Holders of outstanding shares of our Series C Preferred Stock are entitled to one vote per share and vote with the common stock on all matters as to which holders of common stock are entitled to vote.

(c)
Includes 212,905 shares purchasable upon exercise of stock options by each of Dan and Rebecca Matthias (for a total of 425,810 shares). Except for the shares purchasable upon exercise of stock options, Dan and Rebecca Matthias beneficially own the shares indicated jointly as husband and wife.

(d)
Includes 53,010 shares owned by G-II Family Partnership L.P. Mr. Goldblum is general partner of G-II Family Partnership L.P. and may be deemed to be a beneficial owner of such shares. Also includes 18,000 shares purchasable upon exercise of stock options; 15,200 shares held as custodian or in trust for members of Mr. Goldblum's family; 495 shares owned by his wife and 29,670 shares held by Mr. Goldblum as custodian for the benefit of three of the Matthias' children.

(e)
Includes 18,000 shares purchasable upon exercise of stock options.

(f)
Mr. Krell joined us as Senior Vice President — Chief Financial Officer on January 28, 2002.

(g)
Includes 10,000 shares purchasable upon exercise of stock options.

(h)
All shares purchasable upon exercise of stock options. Mr. Schlessinger was elected as a director on January 18, 2002.

(i)
All shares purchasable upon exercise of stock options.

(j)
Includes 6,000 shares purchasable upon exercise of stock options.

(k)
Consisting of shares purchasable upon exercise of warrants.

(l)
Information is based on the Schedule 13G filed with the Securities and Exchange Commission on February 12, 2002. Dimensional Fund Advisors Inc., an investment advisor registered under Section 203 of the Investment Advisors Act of 1940, furnishes investment advice to four investment companies registered under the Investment Company Act of 1940, and serves as investment manager to certain other commingled group trusts and separate accounts. These investment companies' trusts and accounts are the "funds." In its role as investment advisor and investment manager, Dimensional possesses voting and/or investment power over 278,900 shares of our common stock. The funds own all securities reported in the Schedule 13G, and Dimensional disclaims beneficial ownership of such securities.

(m)
Information is based on the Schedule 13G filed with the Securities and Exchange Commission on December 2, 1998. Foremark Investments Ltd. is the record owner of all of the shares; Madeline Wong is the owner of all of the voting and equity securities of Foremark. Such shares do not include 42,000 shares owned by John Charlton, the husband of Madeline Wong.

(n)
Information is based on the Schedule 13D filed with the Securities and Exchange Commission on June 10, 2002. According to that filing, Robert Brown, a general partner of MVP Distribution Partners and its affiliates, including Meridian Venture Partners, beneficially owns 127,600 shares of our common stock, which are not included in the above table.

(o)
Based on the Schedule 13D/A filed with the Securities and Exchange Commission on November 19, 1998, all of such shares may be deemed to be beneficially owned by Oakmont Capital Inc. Oakmont is a part of a group which also includes E.J.K. Real Estate Services Limited, Inc. and 1272562 Ontario, Inc., Gregory P. Hannon and Terence M. Kavanagh. Oakmont has sole voting power and sole dispositive power with respect to 173,800 of such shares. E.J.K. Real Estate Services and 127652 Ontario each own 50% of the voting stock of Oakmont and have shared voting power and shared dispositive power with respect to the shares owned by Oakmont. Mr. Kavanagh owns all of the capital stock in E.J.K. Real Estate Services, and Mr. Hannon owns all of the capital stock of 1272562 Ontario, E.J.K. Real Estate Services, 1272562 Ontario, Mr. Kavanagh, and Mr. Hannon also have sole voting power and sole dispositive power as to shares not directly owned by Oakmont.

(p)
Includes the following number of shares owned by affiliates of the following directors, which may be deemed to be beneficially owned by the directors: Joseph A. Goldblum — 53,010. Also includes the following number of shares purchasable upon the exercise of stock options owned (or which may be deemed to be owned) by the following persons: Joseph A. Goldblum — 18,000, Elam M. Hitchner, III — 18,000, David Mangini — 10,000, Dan W. Matthias — 212,905, Rebecca C. Matthias — 212,905, William A. Schwartz, Jr. — 8,000 and Stanley C. Tuttleman — 6,000.


RELATED PARTY TRANSACTIONS

        One of our directors and the Chairman of our Audit Committee, Elam M. Hitchner, III, is a partner in the law firm of Pepper Hamilton LLP, which provides legal services to us. Mr. Hitchner is a selling stockholder in the concurrent equity offering.

49




DESCRIPTION OF CERTAIN INDEBTEDNESS AND PREFERRED STOCK

Credit Facility

        In April 1998, we obtained a credit facility from Fleet Capital Corporation. We amended this credit facility in April 2000 to increase our available borrowing limit to the current level of $56.0 million, to raise the annual capital expenditure limitation and to extend the date of maturity until September 15, 2004. In October 2001, we again amended the credit facility, primarily to increase the collateral base in order to include the assets that we acquired in the iMaternity acquisition. The interest rate on direct borrowings outstanding is based on Fleet's prime rate. At any time, we may, at our option, elect an alternative rate, for all or part of any direct borrowings outstanding, based on the LIBOR rate. The blended rate for our borrowings under this facility as of March 31, 2002 was approximately 4.0%. Amounts available to us for direct borrowings, net of letters of credit outstanding, are limited to the lesser of (a) the unused portion of the credit facility or (b) a percentage of eligible inventory and receivables as set forth in the facility.

        The credit facility is secured by a security interest in our accounts receivable, inventory, equipment, fixtures, cash and other assets. All of our subsidiaries are jointly and severally liable for the obligations under the facility. We are not bound by any financial covenants in the facility, provided that the amount of eligible inventory and receivables does not fall below $10.0 million. In the event that this amount falls below $10.0 million, we must achieve a minimum cash flow of not less than zero. As of March 31, 2002, outstanding borrowings under the credit facility consisted of $20.4 million in direct borrowings and $2.8 million in letters of credit, with available borrowings of $28.0 million. We are in compliance with all covenants in the facility. In fiscal 2001, 2000 and 1999, the weighted average interest rates on the credit facility were 7.5%, 8.6% and 8.1%, respectively. The credit facility contains customary covenants as well as limitations on our ability to incur additional indebtedness, acquire or sell material assets, pay dividends, redeem our capital stock or merge with another company.

        We have outstanding a $3.4 million standby letter of credit that collateralizes an outstanding industrial revenue bond issued by the Philadelphia Authority for Industrial Development. The terms of the agreement relating to the bond require us to use any amounts we borrow pursuant to the agreement to finance a project to build a manufacturing, office and distribution facility in Philadelphia. The interest rate payable on this bond is variable. As of September 30, 2001, there was $3.4 million outstanding under this bond accruing at an interest rate of 5.0%.

        On or about the closing date of the equity and debt offerings, we intend to enter into an amendment of the credit facility. The amendment will, among other things, modify the covenants to increase the annual capital expenditures limit to $30 million and permit acquisitions, capital stock repurchases and early redemptions of senior notes within specified limits. The amendment will add an unused facility fee of 10 basis points per annum.

125/8% Senior Unsecured Exchange Notes Due 2005

        On August 1, 1995, we issued and sold $92 million aggregate principal amount of 125/8% Senior Unsecured Exchange Notes Due 2005 in a private placement under an indenture between us and J.P. Morgan Trust Company, National Association (as successor to Society National Bank), as Trustee. The notes bear interest at 125/8% per year, payable semiannually in arrears on each February 1 and August 1, and mature on August 1, 2005. The notes are general, unsecured senior obligations. The notes are guaranteed fully, unconditionally and jointly and severally by our subsidiaries, on a senior subordinated basis. Our notes are redeemable, at our option, in whole or in part, at a redemption price of 103.125% prior to July 31, 2002, and at a redemption price of 100.000% on August 1, 2002 and thereafter.

        The provisions of the indenture governing the notes limit our and our subsidiaries' ability, among other things, to: (i) incur additional indebtedness or create contingent liabilities; (ii) create liens;

50


(iii) pay dividends or make other equity distributions in respect of our equity securities; (iv) purchase or redeem capital stock or make certain investments; (v) create any restriction on the ability of our subsidiaries to pay dividends, make loans or transfer assets to us; (vi) sell assets, including the capital stock of our subsidiaries; (vii) enter into any transactions with our stockholders or affiliates; (viii) permit any subsidiary to issue capital stock; (ix) enter into certain sale/leaseback transactions; (x) permit any subsidiary to issue guarantees or (xi) effect a consolidation or merger or transfer of all or substantially all of our assets.

        The indenture for our notes also provides that upon a change of control, as defined in the indenture, we must make an offer to purchase all outstanding notes and each holder of our notes will have the right to require us to repurchase all or any part of the notes held by such holder at a purchase price in cash equal to 101% of the principal amount plus accrued and unpaid interest.

        We expect to use a portion of the net proceeds of this offering to repay our existing notes. On July 10, 2002, we commenced a cash tender offer to purchase any and all outstanding 125/8% senior notes. We also commenced a solicitation of consents to reduce the notice period required by the related indenture for the Company to redeem any existing senior notes that remain outstanding after consummation of the tender offer and to amend or eliminate substantially all of the principal restrictive covenants contained in the related indenture. To the extent that any existing senior notes remain outstanding after consummation of the tender offer, the Company intends to redeem any outstanding existing senior notes.

Other Indebtedness

        We have issued subordinated notes to former holders of shares of our Series A Preferred Stock in lieu of accrued and unpaid dividends. We issued these subordinated notes because we were restricted under the terms of our credit facility from paying cash dividends to these former holders of preferred stock when they converted their shares of Series A Preferred Stock into shares of our common stock. As of March 31, 2002, we had issued an aggregate of $2.4 million of these subordinated notes, and these notes accrue interest at the prime rate. To the extent all or a portion of the subordinated notes are not repaid with the net proceeds, if any, from the concurrent equity offering, we expect to use a portion of the proceeds of this offering to repay the subordinated notes.

        As of September 30, 2001, we had approximately $1.6 million of various government mortgage debt secured by a $1.0 million letter of credit and certain property and equipment, as well as approximately $0.3 million of capital lease obligations.

Preferred Stock

        Pursuant to our amended and restated certificate of incorporation, our Board of Directors is authorized, subject to any limitations prescribed by law, without further action by the stockholders, to issue up to 2,000,000 shares of preferred stock in one or more series or classes and to establish the designations, preferences, qualifications, privileges, limitations, restrictions, options, conversion rights and other special or relative rights of any series of preferred stock issued. To the extent that we redeem or repurchase any shares of our outstanding preferred stock, including shares of our Series A Preferred Stock or Series C Preferred Stock, the number of shares of preferred stock that may be issued will be reduced.

        The issuance of shares of preferred stock could adversely affect the voting power and other rights of holders of our common stock. Because the Board of Directors without stockholder action may fix the terms of the preferred stock, the preferred stock could be issued quickly with terms designed to defeat a proposed takeover of us or to make the removal of our management more difficult. The authority to issue preferred stock or rights to purchase preferred stock could be used to discourage a change in control of Mothers Work. Our management is not aware of any such threatened transaction to obtain control of Mothers Work, and the Board of Directors has no current plans to designate and issue any additional shares of preferred stock.

51


        We have designated shares of Series A Preferred Stock, Series B Preferred Stock and Series C Preferred Stock. The terms of each series of preferred stock are described below. We expect to use a portion of the net proceeds from this offering to, among other things, redeem all of the remaining outstanding shares of our Series A Preferred Stock and to purchase, through an offer to purchase, all of the remaining outstanding shares of our Series C Preferred Stock.

Series A Preferred Stock

        In connection with the Motherhood acquisition on August 1, 1995, we issued 41,000 shares of Series A Preferred Stock with a stated value of $11.5 million. The Series A Preferred Stock has a liquidation preference equal to the stated value plus accrued but unpaid dividends. We may redeem, but are under no obligation to do so, the Series A Preferred Stock at any time at a price equal to liquidation preference, subject to limitations imposed by the terms of our credit facility and the existing senior notes.

        The holders of outstanding shares of our Series A Preferred Stock are entitled to receive annual cash dividends, which are cumulative and compound annually at 8.5% of the stated value. No dividends may be paid on our common stock, or any other shares of our capital stock ranking junior to our Series A Preferred Stock, other than dividends payable in shares of common stock, until all cumulative and current dividends on the Series A Preferred Stock have been declared and paid in full. As of March 31, 2002, the liquidation value of the Series A Preferred Stock was $13.5 million, which includes accrued and unpaid dividends of $5.7 million.

        Our Series A Preferred Stock is convertible into shares of common stock (i) between August 1, 2000 and May 1, 2006, at an initial conversion rate, subject to adjustments for stock splits, stock dividends, recapitalizations and similar events, equal to ten shares of common stock for each share of Series A Preferred Stock or (ii) after November 1, 2006, at a conversion rate determined by dividing the aggregate stated value of all shares of Series A Preferred Stock to be converted by 90% of the then-current market price of the common stock, as defined. After a holder's exercise of the conversion right under clause (i) above, we may only redeem the Series A Preferred Stock from the proceeds of an equity offering. The limitation on this redemption right may only be modified with the consent of the holders of a majority of the outstanding principal amount of our existing senior notes and of the lender under our credit facility. Upon conversion, a holder of Series A Preferred Stock is entitled to receive payment of all accrued and unpaid dividends in cash unless we are prohibited by limitations contained in the indenture for our existing senior notes. In the case of a conversion under clause (i) above, if dividends are not paid in cash due to restrictions imposed by the credit facility or the existing senior notes, we will issue a subordinated note in lieu of cash dividends. If the subordinated notes are not paid by August 1, 2003, then all principal and accrued interest may be converted into that number of shares of common stock determined by dividing the amounts due under the subordinated notes by the then-current market price, as defined. In the case of a conversion under clause (ii) above, if accrued dividends are not paid in cash, then such dividends are convertible into common stock on the same basis as the shares of Series A Preferred Stock. As of March 31, 2002, holders of 13,123 shares of Series A Preferred Stock have elected to convert their shares into shares of common stock. In connection with these conversions, we issued an aggregate of $2.4 million in subordinated notes as payment of accrued dividends.

Series B Preferred Stock

        In connection with the rights agreement dated March 17, 1997, and amended June 4, 1997, October 17, 2001 and June 4, 2002 between us and Stock Trans, Inc., as rights agent, we authorized 10,000 shares of Series B Preferred Stock. The Series B Preferred Stock can be purchased in units equal to one one-thousandth of a share under the terms of the rights agreement. The holders of the preferred stock purchase rights are entitled to receive dividends when and if declared on common stock. Preferred stock purchase rights are junior to the common stock and Series A Preferred Stock

52


and Series C Preferred Stock for both dividends and liquidations. Each preferred stock purchase right votes as one share of common stock.

Series C Preferred Stock

        On October 17, 2001, in connection with our acquisition of iMaternity, we issued 302,619 shares of Series C Preferred Stock, as well as warrants to acquire 350,000 shares of common stock, to the sellers. The holders of the Series C Preferred Stock are entitled to receive dividends, which are cumulative and compound quarterly at the annual rate of 8.625% of the stated value. Dividends accrue for the first year. After the first year, dividends are paid in cash at an annual rate of 2.5% on the stated value and on accrued but unpaid dividends, with the balance accruing. After the second year, dividends are paid in cash at an annual rate of 4.0% on the stated value and on accrued but unpaid dividends, with the balance accruing. Dividends accrue for the first year. As of March 31, 2002, the liquidation value of the Series C Preferred Stock was $20.3 million, which includes accrued and unpaid dividends.

        Each share of Series C Preferred Stock is entitled to one vote and votes together with the holders of the common stock as a single class. The holders of Series C Preferred Stock have the right to receive in a liquidation, dissolution or winding up of the Company, after payment to the holders of the outstanding shares of our Series A Preferred Stock and before any payments to holders of junior stock, an amount per share equal to the stated value plus the greater of accrued dividends or the "participation amount." The "participation amount" is an amount based on 10% of the increase in the market value of our common stock for the period from the acquisition closing date until the date of a liquidation, dissolution or winding up. In addition, beginning on the earlier of October 18, 2006, upon a "change of control," or upon another "fundamental transaction," the holders of outstanding shares of Series C Preferred Stock have the right to require us to purchase their shares for an amount equal to the stated value per share plus accrued and unpaid dividends, which is referred to as the "put right." If we were to default on our obligations under the put right, the holders of outstanding shares of Series C Preferred Stock would have the right to convert their shares of Series C Preferred Stock into shares of common stock. In no event can the aggregate number of shares of common stock issued upon conversion of the Series C Preferred Stock, plus the 350,000 shares issuable upon exercise of the warrants, exceed an amount equal to 19.9% of the total number of outstanding shares of common stock immediately before October 17, 2001.

        Under the terms of the merger agreement in connection with the iMaternity acquisition, we have the right, from October 17, 2001 through April 17, 2004, to make an offer to purchase all outstanding shares of Series C Preferred Stock at a purchase price per share of stated value plus accrued and unpaid dividends. If a majority of the holders of outstanding shares of Series C Preferred Stock fail to accept our offer to purchase, then these holders forfeit their warrants or, if any warrants have been exercised and the underlying shares of common stock have been sold, then such holder forfeits any accrued dividends on the shares of Series C Preferred Stock that he then owns. In addition, upon the failure to accept our offer to purchase, all holders of outstanding shares of Series C Preferred Stock forfeit certain protective provisions under the merger agreement, including, among other things, prohibitions on our issuing senior or parity stock and redeeming junior securities. In addition, beginning on April 18, 2004, we have the right to purchase any outstanding shares of Series C Preferred Stock for cash at a price per share equal to the stated value plus the greater of accrued and unpaid dividends or the participation amount.

53



DESCRIPTION OF NOTES

        We will issue the notes under an indenture between us and J.P. Morgan Trust Company, National Association, as Trustee (the "Indenture"). The terms of the notes include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act.

        Certain terms used in this description are defined under the subheading " — Certain Definitions." In this description, the word "Company" refers only to Mothers Work, Inc. and not to any of its subsidiaries.

        A copy of the Indenture has been filed with the SEC as part of our Registration Statement of which this prospectus is a part. The following description is only a summary of the material provisions of the Indenture. We urge you to read the Indenture because it, not this description, defines your rights as holders of these notes. See "Where You Can Find More Information" for information on how to obtain a copy of the Indenture.

Brief Description of the Notes

        These notes:

Principal, Maturity and Interest

        The Company will issue the notes initially with a maximum aggregate principal amount of $125.0 million. The Company will issue the notes in denominations of $1,000 and any integral multiple of $1,000. The notes will mature on            , 2010. Subject to our compliance with the covenant described under the subheading " — Certain Covenants — Limitation on Indebtedness," the Company, without the consent of the holders, is entitled to issue more notes under the Indenture on the same terms and conditions and with the same CUSIP numbers as the notes being offered hereby (the "additional notes"). The notes and the additional notes, if any, will be treated as a single class for all purposes of the Indenture, including waivers, amendments, redemptions and offers to purchase. Unless the context otherwise requires, for all purposes of the Indenture and this "Description of Notes," references to the notes include any additional notes actually issued.

        Interest on these notes will accrue at the rate of    % per annum and will be payable semiannually in arrears on            and            , commencing on             , 2003. We will make each interest payment to the holders of record of these notes on the immediately preceding            and            . We will pay interest on overdue principal at 1% per annum in excess of the above rate and will pay interest on overdue installments of interest at such higher rate to the extent lawful.

        Interest on these notes will accrue from the date of original issuance. Interest will be computed on the basis of a 360-day year comprised of twelve 30-day months.

Optional Redemption

        Except as set forth below, we will not be entitled to redeem the notes (which include additional notes, if any) at our option prior to            , 2006.

        On and after            , 2006, we will be entitled at our option to redeem all or a portion of these notes (which include additional notes, if any) upon not less than 30 nor more than 60 days notice, at the redemption prices (expressed in percentages of principal amount on the redemption date), plus accrued and unpaid interest to the redemption date (subject to the right of holders of record on the

54



related record date to receive interest due on the relevant interest payment date) if redeemed during the 12-month period commencing on            of the years set forth below:

Period

  Redemption Price
 
2006     %
2007     %
2008     %
2009 and thereafter   100.00 %

        Prior to            , 2005, we may at our option on one or more occasions redeem notes (which include additional notes, if any) in an aggregate principal amount not to exceed 35% of the aggregate principal amount of the notes (which include additional notes, if any) originally issued at a redemption price (expressed as a percentage of principal amount) of    %, plus accrued and unpaid interest to the redemption date, with the net cash proceeds from one or more Public Equity Offerings; provided that

Selection and Notice of Redemption

        If we are redeeming fewer than all the notes at any time, the Trustee will select notes on a pro rata basis, by lot or by such other method as the Trustee in its sole discretion shall deem to be fair and appropriate.

        We will redeem notes of $1,000 or less in whole and not in part. We will cause notices of redemption to be mailed by first-class mail at least 30 but not more than 60 days before the redemption date to each holder of notes to be redeemed at its registered address.

        If any note is to be redeemed in part only, the notice of redemption that relates to that note will state the portion of the principal amount thereof to be redeemed. We will issue a new note in a principal amount equal to the unredeemed portion of the original note in the name of the holder thereof upon cancellation of the original note. Notes called for redemption become due on the date fixed for redemption. On and after the redemption date, interest ceases to accrue on notes or portions of them called for redemption.

Mandatory Redemption; Offers to Purchase; Open Market Purchases

        We are not required to make any mandatory redemption or sinking fund payments with respect to the notes. However, under certain circumstances, we may be required to offer to purchase notes as described under the captions " — Change of Control" and " — Certain Covenants — Limitation on Sales of Assets and Subsidiary Stock." We may at any time and from time to time purchase notes in the open market or otherwise.

Guaranties

        The Subsidiary Guarantors will jointly and severally guarantee, on a senior unsecured basis, our obligations under these notes. The obligations of each Subsidiary Guarantor under its Subsidiary Guaranty will be limited as necessary to prevent that Subsidiary Guaranty from constituting a fraudulent conveyance under applicable law. See "Risk Factors — Federal and state statutes allow

55



courts, under specific circumstances, to void guarantees and require note holders to return payments received from guarantors."

        Each Subsidiary Guarantor that makes a payment under its Subsidiary Guaranty will be entitled upon payment in full of all guaranteed obligations under the Indenture to a contribution from each other Subsidiary Guarantor in an amount equal to such other Subsidiary Guarantor's pro rata portion of such payment based on the respective net assets of all the Subsidiary Guarantors at the time of such payment determined in accordance with GAAP.

        If a Subsidiary Guaranty were rendered voidable, it could be subordinated by a court to all other indebtedness (including guarantees and other contingent liabilities) of the applicable Subsidiary Guarantor, and, depending on the amount of such indebtedness, a Subsidiary Guarantor's liability on its Subsidiary Guaranty could be reduced to zero. See "Risk Factors — Federal and state statutes allow courts, under specific circumstances, to void guarantees and require note holders to return payments received from guarantors."

        The Subsidiary Guaranty of a Subsidiary Guarantor will be released:

        in each case in accordance with the provisions of the Indenture and in each case described in clauses (1) and (2), only if such sale or disposition is to a Person other than the Company or an Affiliate of the Company.

Ranking

Senior Indebtedness versus Notes

        The indebtedness evidenced by these notes and the Subsidiary Guaranties will be unsecured and will rank pari passu in right of payment to the Senior Indebtedness of the Company and the Subsidiary Guarantors, as the case may be. The notes will be guaranteed by the Subsidiary Guarantors.

        As of March 31, 2002, after giving pro forma effect to this Offering:

        The notes are unsecured obligations of the Company. Secured debt and other secured obligations of the Company (including obligations with respect to the Credit Agreement) will be effectively senior to the notes to the extent of the value of the assets securing such debt or other obligations.

Liabilities of Subsidiaries versus Notes

        A portion of our operations are conducted through our subsidiaries. Some of our subsidiaries are not guaranteeing our obligations with respect to the notes. Claims of creditors of non-guarantor subsidiaries, including trade creditors and creditors holding indebtedness or guarantees issued by such non-guarantor subsidiaries and claims of preferred stockholders of such non-guarantor subsidiaries generally will have priority with respect to the assets and earnings of such non-guarantor subsidiaries over the claims of our creditors, including holders of the notes. Accordingly, the notes will be effectively subordinated to creditors (including trade creditors) and preferred stockholders, if any, of our non-guarantor subsidiaries.

56



        At March 31, 2002, the total liabilities of our subsidiaries (other than the Subsidiary Guarantors) were less than $1 million, including trade payables. Although the Indenture limits the incurrence of Indebtedness and Preferred Stock of certain of our subsidiaries, such limitation is subject to a number of significant qualifications. Moreover, the Indenture does not impose any limitation on the incurrence by such subsidiaries of liabilities that are not considered Indebtedness under the Indenture. See " — Certain Covenants — Limitation on Indebtedness."

Book-Entry, Delivery and Form

        Except as described below, the notes sold will initially be issued in the form of one or more global notes (the "Global notes"). The Global notes will be deposited with, or on behalf of, The Depository Trust Company (the "Depository") and registered in the name of the Depository or its nominee. Except as set forth below, the Global notes may be transferred, in whole and not in part, only to the Depository or another nominee of the Depository. Investors may hold their beneficial interests in the Global notes directly through the Depository if they have an account with the Depository or indirectly through organizations which have accounts with the Depository.

        The Depository has advised us as follows: The Depository is a limited-purpose trust company organized under the laws of the State of New York, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the New York Uniform Commercial Code, and a "clearing agency" registered pursuant to the provisions of Section 17A of the Exchange Act. The Depository was created to hold securities of institutions that have accounts with the Depository ("participants") and to facilitate the clearance and settlement of securities transactions among its participants in such securities through electronic book-entry changes in accounts of the participants, thereby eliminating the need for physical movement of securities certificates. The Depository's participants include securities brokers and dealers, including the Underwriters, banks, trust companies, clearing corporations and certain other organizations, some of which (and/or their representatives) own the Depository. Access to the Depository's book-entry system is also available to others such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a participant, either directly or indirectly.

        Upon the issuance by the Company of notes represented by the Global notes, the Depository or its nominee will credit, on its book-entry registration and transfer system, the principal amount of the notes represented by such Global notes to the accounts of participants. The accounts to be credited shall be designated by the Underwriters. Ownership of beneficial interests in the notes represented by Global notes will be limited to participants or persons that hold interests through participants. Ownership of such beneficial interests in notes will be shown on, and the transfer of that ownership will be effected only through, records maintained by the Depository (with respect to participants' interests) and such participants (with respect to the owners of beneficial interests in the Global notes other than participants). The laws of some jurisdictions may require that certain purchasers of securities take physical delivery of such securities in definitive form. Such laws may impair the ability to transfer or pledge beneficial interests in notes represented by Global notes.

        So long as the Depository, or its nominee, is the registered holder and owner of the Global notes, the Depository or such nominee, as the case may be, will be considered the sole legal owner and holder of the related notes for all purposes of such notes and the Indenture. Except as set forth below, owners of beneficial interests in the Global notes will not be entitled to have the notes represented by the Global notes registered in their names, will not receive or be entitled to receive physical delivery or certificated notes in definitive form and will not be considered to be the owners or holders of any notes under the Indenture. We understand that under existing industry practice, in the event an owner of a beneficial interest in the Global notes desires to take any action that the Depository, as the holder of the Global notes, is entitled to take, the Depository would authorize the participants to take such action, and that the participants would authorize beneficial owners owning through such participants to

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take such action or would otherwise act upon the instructions of beneficial owners owning through them.

        Payment of principal of and interest on notes represented by Global notes registered in the name of and held by the Depository or its nominee will be made by the Company through the Paying Agent (as defined in the Indenture) to the Depository or its nominee, as the case may be, as the registered owner and Holder of such Global notes. We expect that the Depository or its nominee, upon receipt of any payment of principal of or interest on the notes represented by Global notes, will credit participants' accounts with payments in amounts proportionate to their respective beneficial interests in the principal amount of the Global notes as shown on the records of the Depository or its nominee. We also expect that payments by participants to owners of beneficial interests in the notes represented by Global notes held through such participants will be governed by standing instructions and customary practices and will be the responsibility of such participants. We will not have any responsibility or liability for any aspect of the records relating to, or payments made on account of, beneficial ownership interests in the notes represented by Global notes or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests or for any other aspect of the relationship between the Depository and its participants or the relationship between such participants and the owners of beneficial interests in the notes represented by Global notes owned through such participants. Unless and until they are exchanged in whole or in part for certificated notes in definitive form, the Global notes may not be transferred except as a whole by the Depository to a nominee of such Depository or by a nominee of such Depository to such Depository or another nominee of such Depository.

        Although the Depository has agreed to the above described procedures in order to facilitate transfers of interests in the notes represented by Global notes among participants of the Depository, it is under no obligation to perform or continue to perform such procedures, and such procedures may be discontinued at any time. None of the Trustee, the Company or the Underwriters will have any responsibility for the performance by the Depository or its participants or indirect participants of their respective obligations under the rules and procedures governing their operations.

Certificated Notes

        The notes represented by the Global notes are exchangeable for certificated notes in definitive form of like tenor as such notes in denominations of $1,000 and integral multiples thereof only if:

        Any note that is exchangeable pursuant to the preceding sentence is exchangeable for certificated notes issuable in authorized denominations and registered in such names as the Depository shall direct. Subject to the foregoing, the Global notes are not exchangeable, except for a Global note of the same aggregate denomination to be registered in the name of the Depository or its nominee.

Same Day Payment

        The Indenture will require that payments in respect of notes (including principal, premium, if any, and interest) be made by wire transfer of immediately available funds to the accounts specified by the holders thereof.

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Change of Control

        Upon the occurrence of any of the following events (each a "Change of Control") each holder shall have the right to require that we repurchase such holder's notes at a purchase price in cash equal to 101% of the principal amount thereof on the date of purchase plus accrued and unpaid interest, if any, to the date of purchase (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date):

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        Within 30 days following any Change of Control, we will mail a notice to each holder with a copy to the Trustee (the "Change of Control Offer") stating:

        We will not be required to make a Change of Control Offer following a Change of Control if a third party makes the Change of Control Offer in the manner, at the times and otherwise in compliance with the requirements set forth in the Indenture applicable to a Change of Control Offer made by us and purchases all notes validly tendered and not withdrawn under such Change of Control Offer.

        We will comply, to the extent applicable, with the requirements of Section 14(e) of the Exchange Act and any other securities laws or regulations in connection with the repurchase of notes as a result of a Change of Control. To the extent that the provisions of any securities laws or regulations conflict with the provisions of the covenant described hereunder, we will comply with the applicable securities laws and regulations and shall not be deemed to have breached our obligations under the covenant described hereunder by virtue of our compliance with such securities laws or regulations.

        The Change of Control purchase feature of the notes may in certain circumstances make more difficult or discourage a sale or takeover of the Company and, thus, the removal of incumbent management. The Change of Control purchase feature is a result of negotiations between the Company and the Underwriters. We have no present intention to engage in a transaction involving a Change of Control, although it is possible that we could decide to do so in the future. Subject to the limitations discussed below, we could, in the future, enter into certain transactions, including acquisitions, refinancings or other recapitalizations, that would not constitute a Change of Control under the Indenture, but that could increase the amount of indebtedness outstanding at such time or otherwise affect our capital structure or credit ratings. Restrictions on our ability to Incur additional Indebtedness are contained in the covenants described under " — Certain Covenants — Limitation on Indebtedness," " — Limitation on Liens" and " — Limitation on Sale/Leaseback Transactions." These restrictions can only be waived with the consent of the holders of a majority in principal amount of the notes then outstanding. Except for the limitations contained in such covenants, however, the Indenture will not contain any covenants or provisions that may afford holders of the notes protection in the event of a highly leveraged transaction.

        Our Credit Agreement currently prohibits purchasing the notes without our lender's consent. In the event a Change of Control occurs at a time when we are prohibited from purchasing notes, we may seek the consent of our lenders to the purchase of notes or may attempt to refinance the borrowings that contain such prohibition. If we do not obtain such a consent or repay such borrowings, we will remain prohibited from purchasing notes. In such case, our failure to offer to purchase notes would constitute a Default under the Indenture, which would, in turn, constitute a default under the Credit Agreement.

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        Future indebtedness that we may incur may contain prohibitions on the occurrence of certain events that would constitute a Change of Control or require the repurchase of such indebtedness upon a Change of Control. Moreover, the exercise by the holders of their right to require us to repurchase the notes could cause a default under such indebtedness, even if the Change of Control itself does not, due to the financial effect of such repurchase on us. Finally, our ability to pay cash to the holders of the notes following the occurrence of a Change of Control may be limited by our then existing financial resources. There can be no assurance that sufficient funds will be available when necessary to make any required repurchases.

        The definition of "Change of Control" includes a disposition of all or substantially all of the assets of the Company to any Person. Although there is a limited body of case law interpreting the phrase "substantially all," there is no precise established definition of the phrase under applicable law. Accordingly, in certain circumstances there may be a degree of uncertainty as to whether a particular transaction would involve a disposition of "all or substantially all" of the assets of the Company. As a result, it may be unclear as to whether a Change of Control has occurred and whether a holder of notes may require the Company to make an offer to repurchase the notes as described above.

        The provisions under the Indenture relative to our obligation to make an offer to repurchase the notes as a result of a Change of Control may be waived or modified with the written consent of the holders of a majority in principal amount of the notes.

Certain Covenants

        The Indenture contains covenants, including, among others, the following:

Limitation on Indebtedness

        (a) The Company will not, and will not permit any Restricted Subsidiary to, Incur, directly or indirectly, any Indebtedness; provided, however, that the Company and its Subsidiary Guarantors will be entitled to Incur Indebtedness if, on the date of such Incurrence and after giving effect thereto on a pro forma basis, no Default has occurred and is continuing and the Consolidated Coverage Ratio exceeds 2.0 to 1.0.

        (b) Notwithstanding the foregoing paragraph (a), the Company and the Subsidiary Guarantors will be entitled to Incur any or all of the following Indebtedness:

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        (c) Notwithstanding the foregoing, neither the Company nor any Subsidiary Guarantor will Incur any Indebtedness pursuant to the foregoing paragraph (b) if the proceeds thereof are used, directly or indirectly, to Refinance any Subordinated Obligations of the Company or any Subsidiary Guarantor unless such Indebtedness shall be subordinated to the notes or the applicable Subsidiary Guaranty to at least the same extent as such Subordinated Obligations.

        (d) For purposes of determining compliance with this covenant:

        The accrual of interest, the accretion or amortization of original issue discount and the payment of interest on any Indebtedness in the form of additional Indebtedness with the same terms will not be deemed to be an incurrence of Indebtedness for purposes of this covenant; provided, however, that the amount thereof is included in Consolidated Interest Expense of the Company and its consolidated Restricted Subsidiaries as accrued.

Limitation on Restricted Payments

        (a) The Company will not, and will not permit any Restricted Subsidiary, directly or indirectly, to make a Restricted Payment if at the time the Company or such Restricted Subsidiary makes such Restricted Payment:

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        (b) The preceding provisions will not prohibit:

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Limitation on Restrictions on Distributions from Restricted Subsidiaries

        The Company will not, and will not permit any Restricted Subsidiary to, create or otherwise cause or permit to exist or become effective any consensual encumbrance or restriction on the ability of any Restricted Subsidiary to (a) pay dividends or make any other distributions on its Capital Stock to the Company or a Restricted Subsidiary or pay any Indebtedness owed to the Company, (b) make any loans or advances to the Company or (c) transfer any of its property or assets to the Company, except:

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Limitation on Sales of Assets and Subsidiary Stock

        (a) The Company will not, and will not permit any Restricted Subsidiary to, directly or indirectly, consummate any Asset Disposition unless:

        Pending application of Net Available Cash pursuant to this covenant, such Net Available Cash shall be invested in Temporary Cash Investments or applied to temporarily reduce revolving credit indebtedness, if any.

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        For the purposes of this covenant, the following are deemed to be cash or cash equivalents:

        (b) In the event of an Asset Disposition that requires the purchase of notes (and other Senior Indebtedness of the Company) pursuant to clause (a)(3)(C) above, the Company will purchase notes tendered pursuant to an offer by the Company for the notes (and such other Senior Indebtedness) at a purchase price of 100% of their principal amount (or, in the event such other Senior Indebtedness of the Company was issued with significant original issue discount, 100% of the accreted value thereof) without premium, plus accrued but unpaid interest (or, in respect of such other Senior Indebtedness of the Company, such lesser price, if any, as may be provided for by the terms of such Senior Indebtedness) in accordance with the procedures (including prorating in the event of oversubscription) set forth in the Indenture. If the aggregate purchase price of the securities tendered exceeds the Net Available Cash allotted to their purchase, the Company will select the securities to be purchased on a pro rata basis but in round denominations, which in the case of the notes will be denominations of $1,000 principal amount or multiples thereof. The Company shall not be required to make such an offer to purchase notes (and other Senior Indebtedness of the Company) pursuant to this covenant if the Net Available Cash available therefor is less than $10.0 million (which lesser amount shall be carried forward for purposes of determining whether such an offer is required with respect to the Net Available Cash from any subsequent Asset Disposition).

        (c) The Company will comply, to the extent applicable, with the requirements of Section 14(e) of the Exchange Act and any other securities laws or regulations in connection with the repurchase of notes pursuant to this covenant. To the extent that the provisions of any securities laws or regulations conflict with provisions of this covenant, the Company will comply with the applicable securities laws and regulations and will not be deemed to have breached its obligations under this covenant by virtue of its compliance with such securities laws or regulations.

        In the event of an Asset Disposition that requires the purchase of notes pursuant to clause (a)(3)(C) above, at a time when we are prohibited from purchasing notes, we may seek the consent of our lenders to the purchase of notes or may attempt to refinance the borrowings that contain such prohibition. If we do not obtain such a consent or repay such borrowings, we will remain prohibited from purchasing notes. In such case, our failure to offer to purchase notes would constitute a Default under the Indenture, which would, in turn, constitute a default under the Credit Agreement.

Limitation on Affiliate Transactions

        (a) The Company will not, and will not permit any Restricted Subsidiary to, enter into or permit to exist any transaction (including the purchase, sale, lease or exchange of any property, employee compensation arrangements or the rendering of any service) with, or for the benefit of, any Affiliate of the Company (an "Affiliate Transaction") unless:

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        (b) The provisions of the preceding paragraph (a) will not prohibit:

Limitation on the Sale or Issuance of Capital Stock of Restricted Subsidiaries

        The Company:

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Limitation on Liens

        The Company will not, and will not permit any Restricted Subsidiary to, directly or indirectly, incur or permit to exist any Lien of any nature whatsoever on any of its properties (including Capital Stock of a Restricted Subsidiary), whether owned at the Issue Date or thereafter acquired, other than Permitted Liens, without effectively providing that the notes shall be secured equally and ratably with (or prior to) the obligations so secured for so long as such obligations are so secured.

Limitation on Sale/Leaseback Transactions

        The Company will not, and will not permit any Restricted Subsidiary to, enter into any Sale/Leaseback Transaction with respect to any property unless (i) the Company or such Subsidiary would be entitled to (A) incur Indebtedness in an amount equal to the Attributable Debt with respect to such Sale/Leaseback Transaction pursuant to the covenant described under "  —  Certain Covenants  —  Limitation on Indebtedness" and (B) create a Lien on such property securing such Attributable Debt without equally and ratably securing the notes pursuant to the covenant described under "  —  Certain Covenants  —  Limitation on Liens," (ii) the net proceeds received by the Company or any Restricted Subsidiary in connection with such Sale/Leaseback Transaction are at least equal to the fair value (as determined by the Board of Directors) of such property and (iii) the Company applies the proceeds of such transaction in compliance with the covenant described under "  —  Certain Covenants  —  Limitation on Sales of Assets and Subsidiary Stock."

Merger and Consolidation

        The Company will not consolidate with or merge with or into, or convey, transfer or lease, in one transaction or a series of transactions, directly or indirectly, all or substantially all its assets to any Person, unless:

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provided, however, that clauses (3) and (4) will not be applicable to (A) a Restricted Subsidiary consolidating with, merging into or transferring all or part of its properties and assets to the Company or another Restricted Subsidiary or (B) the Company merging with an Affiliate of the Company solely for the purpose and with the sole effect of reincorporating the Company in another jurisdiction.

        For purposes of this covenant, the sale, lease, conveyance, assignment, transfer or other disposition of all or substantially all of the properties and assets of one or more Subsidiaries of the Company, which properties and assets, if held by the Company instead of such Subsidiaries, would constitute all or substantially all of the properties and assets of the Company on a consolidated basis, shall be deemed to be the transfer of all or substantially all of the properties and assets of the Company.

        The Successor Company will be the successor to the Company and shall succeed to, and be substituted for, and may exercise every right and power of, the Company under the Indenture, and the predecessor Company, except in the case of a lease, shall be released from the obligation to pay the principal of and interest on the notes.

        The Company will not permit any Subsidiary Guarantor to consolidate with or merge with or into, or convey, transfer or lease, in one transaction or a series of transactions, all or substantially all of its assets to any Person unless:

Additional Subsidiary Guarantees

        If the Company or any of its Restricted Subsidiaries acquires, creates or designates another domestic Restricted Subsidiary, then such newly acquired, created or designated Restricted Subsidiary shall, within 30 days after the date of its acquisition, creation or designation, execute and deliver to the Trustee a Guaranty Agreement in form reasonably satisfactory to the Trustee pursuant to which such Subsidiary shall unconditionally guarantee all of the Company's obligations under the notes and the Indenture on the terms set forth in the Indenture. Thereafter, such Subsidiary shall be a Subsidiary Guarantor for all purposes of the Indenture.

SEC Reports

        Notwithstanding that the Company may not be subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company will file with the SEC (to the extent that the SEC will

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accept such filing) and provide the Trustee and Noteholders with such annual reports and such information, documents and other reports as are specified in Sections 13 and 15(d) of the Exchange Act and applicable to a U.S. corporation subject to such Sections, such information, documents and other reports to be so filed and provided at the times specified for the filings of such information, documents and reports under such Sections.

        At any time that any of the Company's Subsidiaries are Unrestricted Subsidiaries, then the quarterly and annual financial information required by the preceding paragraph will include a reasonably detailed presentation, either on the face of the financial statements or in the footnotes thereto, and in "Management's Discussion and Analysis of Financial Condition and Results of Operations," of the financial condition and results of operations of the Company and its Restricted Subsidiaries separate from the financial condition and results of operations of the Unrestricted Subsidiaries of the Company.

Defaults

        Each of the following is an Event of Default:

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However, a default under clauses (4) and (5) will not constitute an Event of Default until the Trustee or the Holders of 25% in principal amount of the outstanding notes notify the Company of the default and the Company does not cure such default within the time specified after receipt of such notice.

        If an Event of Default occurs and is continuing, the Trustee or the holders of at least 25% in principal amount of the outstanding notes may declare the principal of and accrued but unpaid interest on all the notes to be due and payable. Upon such a declaration, such principal and interest shall be due and payable immediately. If an Event of Default relating to certain events of bankruptcy, insolvency or reorganization of the Company occurs and is continuing, the principal of and interest on all the notes will ipso facto become and be immediately due and payable without any declaration or other act on the part of the Trustee or any holders of the notes. Under certain circumstances, the holders of a majority in principal amount of the outstanding notes may rescind any such acceleration with respect to the notes and its consequences.

        Subject to the provisions of the Indenture relating to the duties of the Trustee, in case an Event of Default occurs and is continuing, the Trustee will be under no obligation to exercise any of the rights or powers under the Indenture at the request or direction of any of the holders of the notes unless such holders have offered to the Trustee reasonable indemnity or security against any loss, liability or expense. Except to enforce the right to receive payment of principal, premium (if any) or interest when due, no holder of a Note may pursue any remedy with respect to the Indenture or the notes unless:

        Subject to certain restrictions, the holders of a majority in principal amount of the outstanding notes are given the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or of exercising any trust or power conferred on the Trustee. The Trustee, however, may refuse to follow any direction that conflicts with law or the Indenture or that the Trustee determines is unduly prejudicial to the rights of any other holder of a Note or that would involve the Trustee in personal liability.

        If a Default occurs, is continuing and is known to the Trustee, the Trustee must mail to each holder of the notes notice of the Default within 90 days after it occurs. Except in the case of a Default in the payment of principal of or interest on any Note, the Trustee may withhold notice if and so long as a committee of its Trust Officers determines that withholding notice is not opposed to the interest of the holders of the notes. In addition, we are required to deliver to the Trustee, within 120 days after the end of each fiscal year, a certificate indicating whether the signers thereof know of any Default that occurred during the previous year. We are required to deliver to the Trustee, within 30 days after the occurrence thereof, written notice of any event which would constitute certain Defaults, their status and what action we are taking or propose to take in respect thereof.

Amendments and Waivers

        Subject to certain exceptions, the Indenture may be amended with the consent of the holders of a majority in principal amount of the notes then outstanding (including consents obtained in connection with a tender offer or exchange for the notes) and any past default or non-compliance with any

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provisions may also be waived with the consent of the holders of a majority in principal amount of the notes then outstanding. However, without the consent of each holder of an outstanding Note affected thereby, an amendment or waiver may not, among other things:

        Notwithstanding the preceding, without the consent of any holder of the notes, the Company, the Subsidiary Guarantors and Trustee may amend the Indenture:

        The consent of the holders of the notes is not necessary under the Indenture to approve the particular form of any proposed amendment. It is sufficient if such consent approves the substance of the proposed amendment.

        After an amendment under the Indenture becomes effective, we are required to mail to holders of the notes a notice briefly describing such amendment. However, the failure to give such notice to all holders of the notes, or any defect therein, will not impair or affect the validity of the amendment.

Transfer

        The notes will be issued in registered form and will be transferable only upon the surrender of the notes being transferred for registration of transfer. We may require payment of a sum sufficient to

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cover any tax, assessment or other governmental charge payable in connection with certain transfers and exchanges.

Defeasance

        At any time, we may terminate all our obligations under the notes and the Indenture ("legal defeasance"), except for certain obligations, including those respecting the defeasance trust and obligations to register the transfer or exchange of the notes, to replace mutilated, destroyed, lost or stolen notes and to maintain a registrar and paying agent in respect of the notes.

        In addition, at any time we may terminate our obligations under "  —  Change of Control" and under the covenants described under "  —  Certain Covenants" (other than the covenant described under "  —  Certain Covenants  —  Merger and Consolidation"), the operation of the cross acceleration provision, the bankruptcy provisions with respect to Significant Subsidiaries and Subsidiary Guarantors and the judgment default provision described under "  —  Defaults" above and the limitations contained in clauses (3) and (4) of the first paragraph under "  —  Certain Covenants  —  Merger and Consolidation" above ("covenant defeasance").

        We may exercise our legal defeasance option notwithstanding our prior exercise of our covenant defeasance option. If we exercise our legal defeasance option, payment of the notes may not be accelerated because of an Event of Default with respect thereto. If we exercise our covenant defeasance option, payment of the notes may not be accelerated because of an Event of Default specified in clause (4), (6), (7) (with respect only to Significant Subsidiaries and Subsidiary Guarantors) or (8) of the first paragraph under "  —  Defaults" above or because of the failure of the Company to comply with clause (3) or (4) of the first paragraph under "  —  Certain Covenants  —  Merger and Consolidation" above. If we exercise our legal defeasance option or our covenant defeasance option, each Subsidiary Guarantor will be released from all of its obligations with respect to the its Subsidiary Guaranty.

        In order to exercise either of our defeasance options, we must irrevocably deposit in trust (the "defeasance trust") with the Trustee money or U.S. Government Obligations for the payment of principal and interest on the notes to redemption or maturity, as the case may be, and must comply with certain other conditions, including delivery to the Trustee of an Opinion of Counsel to the effect that holders of the notes will not recognize income, gain or loss for Federal income tax purposes as a result of such deposit and defeasance and will be subject to Federal income tax on the same amounts and in the same manner and at the same times as would have been the case if such deposit and defeasance had not occurred (and, in the case of legal defeasance only, such Opinion of Counsel must be based on a ruling of the Internal Revenue Service or other change in applicable Federal income tax law).

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Concerning the Trustee

        J.P. Morgan Trust Company, National Association, is to be the Trustee under the Indenture. We have appointed the Trustee as Registrar and Paying Agent with regard to the notes.

        The Indenture contains certain limitations on the rights of the Trustee, should it become a creditor of the Company, to obtain payment of claims in certain cases, or to realize on certain property received in respect of any such claim as security or otherwise. The Trustee will be permitted to engage in other transactions; provided, however, that if it acquires any conflicting interest, it must either eliminate such conflict within 90 days, apply to the SEC for permission to continue or resign.

        The Holders of a majority in principal amount of the outstanding notes will have the right to direct the time, method and place of conducting any proceeding for exercising any remedy available to the Trustee, subject to certain exceptions. If an Event of Default occurs (and is not cured), the Trustee will be required, in the exercise of its power, to use the degree of care of a prudent man in the conduct of his own affairs. Subject to such provisions, the Trustee will be under no obligation to exercise any of its rights or powers under the Indenture at the request of any Holder of notes, unless such Holder shall have offered to the Trustee security and indemnity satisfactory to it against any loss, liability or expense and then only to the extent required by the terms of the Indenture.

No Personal Liability of Directors, Officers, Employees and Stockholders

        No director, officer, employee, incorporator or stockholder of the Company or any Subsidiary Guarantor will have any liability for any obligations of the Company or any Subsidiary Guarantor under the notes, any Subsidiary Guaranty or the Indenture or for any claim based on, in respect of, or by reason of such obligations or their creation. Each Holder of the notes, by accepting a Note, waives and releases all such liability. The waiver and release are part of the consideration for issuance of the notes. Such waiver and release may not be effective to waive liabilities under the U.S. federal securities laws, and it is the view of the SEC that such a waiver is against public policy.

Governing Law

        The Indenture and the notes will be governed by, and construed in accordance with, the laws of the State of New York without giving effect to applicable principles of conflicts of law to the extent that the application of the law of another jurisdiction would be required thereby.

Certain Definitions

        "Additional Assets" means:

provided, however, that any such Restricted Subsidiary described in clause (2) or (3) above is primarily engaged in a Related Business.

        "Affiliate" of any specified Person means any other Person, directly or indirectly, controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, "control" when used with respect to any Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings

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correlative to the foregoing. For purposes of the covenants described under " — Certain Covenants — Limitation on Restricted Payments," " —Certain Covenants — Limitation on Affiliate Transactions" and " — Certain Covenants — Limitation on Sales of Assets and Subsidiary Stock" only, "Affiliate" shall also mean any beneficial owner of Capital Stock representing 10% or more of the total voting power of the Voting Stock (on a fully diluted basis) of the Company or of rights or warrants to purchase such Capital Stock (whether or not currently exercisable) and any Person who would be an Affiliate of any such beneficial owner pursuant to the first sentence hereof.

        "Asset Disposition" means any sale, lease, transfer or other disposition (or series of related sales, leases, transfers or dispositions) by the Company or any Restricted Subsidiary, including any disposition by means of a merger, consolidation or similar transaction (each referred to for the purposes of this definition as a "disposition"), of:

        other than, in the case of clauses (1), (2) and (3) above,

        "Attributable Debt" in respect of a Sale/Leaseback Transaction means, as at the time of determination, the present value (discounted at the interest rate borne by the notes, compounded annually) of the total obligations of the lessee for rental payments during the remaining term of the lease included in such Sale/Leaseback Transaction (including any period for which such lease has been extended).

        "Average Life" means, as of the date of determination, with respect to any Indebtedness, the quotient obtained by dividing:

        "Board of Directors" means the Board of Directors of the Company or any committee thereof duly authorized to act on behalf of such Board.

        "Business Day" means each day which is not a Legal Holiday.

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        "Capital Lease Obligation" means an obligation that is required to be classified and accounted for as a capital lease for financial reporting purposes in accordance with GAAP, and the amount of Indebtedness represented by such obligation shall be the capitalized amount of such obligation determined in accordance with GAAP; and the Stated Maturity thereof shall be the date of the last payment of rent or any other amount due under such lease prior to the first date upon which such lease may be terminated by the lessee without payment of a penalty.

        "Capital Stock" of any Person means any and all shares, interests, units, rights to purchase, warrants, options, participations or other equivalents of or interests in (however designated) equity of such Person, including any Preferred Stock, but excluding any debt securities convertible into such equity.

        "Code" means the Internal Revenue Code of 1986, as amended.

        "Consolidated Coverage Ratio" as of any date of determination means the ratio of (x) the aggregate amount of EBITDA for the period of (i) the most recent four consecutive fiscal quarters ending at least 45 days prior to the date of such determination or (ii) if quarterly information is included in the reports filed or delivered pursuant to the covenant described under "— SEC Reports," the most recent four consecutive fiscal quarters, to (y) Consolidated Interest Expense for such four fiscal quarters; provided, however, that:

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        For purposes of this definition, whenever pro forma effect is to be given to an acquisition of assets, the amount of income or earnings relating thereto and the amount of Consolidated Interest Expense associated with any Indebtedness Incurred in connection therewith, the pro forma calculations shall be determined in good faith by a responsible financial or accounting Officer of the Company. If any Indebtedness bears a floating rate of interest and is being given pro forma effect, the interest on such Indebtedness shall be calculated as if the rate in effect on the date of determination had been the applicable rate for the entire period (taking into account any Interest Rate Agreement applicable to such Indebtedness if such Interest Rate Agreement has a remaining term in excess of 12 months).

        "Consolidated Current Liabilities" as of the date of determination means the aggregate amount of liabilities of the Company and its consolidated Restricted Subsidiaries which may properly be classified as current liabilities (including taxes accrued as estimated), on a consolidated basis, after eliminating:

        "Consolidated Interest Expense" means, for any period, the total interest expense of the Company and its consolidated Restricted Subsidiaries, plus, to the extent not included in such total interest expense, and to the extent incurred by the Company or its Restricted Subsidiaries, without duplication:

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        "Consolidated Net Income" means, for any period, the net income of the Company and its consolidated Subsidiaries as determined in accordance with GAAP; provided, however, that there shall not be included in such Consolidated Net Income:

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        Notwithstanding the foregoing, for the purposes of the covenant described under " — Certain Covenants — Limitation on Restricted Payments" only, there shall be excluded from Consolidated Net Income any repurchases, repayments or redemptions of Investments, proceeds realized on the sale of Investments or return of capital to the Company or a Restricted Subsidiary to the extent such repurchases, repayments, redemptions, proceeds or returns increase the amount of Restricted Payments permitted under such covenant pursuant to clause (a)(3)(D) thereof.

        "Consolidated Net Tangible Assets" as of any date of determination, means the total amount of assets (less accumulated depreciation and amortization, allowances for doubtful receivables, other applicable reserves and other properly deductible items) which would appear on a consolidated balance sheet of the Company and its consolidated Restricted Subsidiaries, determined on a consolidated basis in accordance with GAAP, and after giving effect to purchase accounting and after deducting therefrom Consolidated Current Liabilities and, to the extent otherwise included, the amounts of:


        "Consolidated Net Worth" means the total of the amounts shown on the balance sheet of the Company and its consolidated Subsidiaries, determined on a consolidated basis in accordance with GAAP, as of the end of the most recent fiscal quarter of the Company ending at least 45 days prior to the taking of any action for the purpose of which the determination is being made, as the sum of:

less (A) any accumulated deficit and (B) any amounts attributable to Disqualified Stock.

        "Credit Agreement" means the Loan and Security Agreement, dated as of April 24, 1998, by and among the Company, Cave Springs, Inc., Fleet Capital Corporation, as lender, together with the related documents thereto (including the revolving loans thereunder, any guarantees and security documents), as amended, extended, renewed, restated, supplemented or otherwise modified (in whole or in part, and without limitation as to amount, terms, conditions, covenants and other provisions) from time to time, and any agreement (and related document) governing Indebtedness incurred to Refinance, in whole or in part, the borrowings and commitments then outstanding or permitted to be outstanding

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under such Credit Agreement or a successor Credit Agreement, whether by the same or any other lender or group of lenders.

        "Currency Agreement" means in respect of a Person any foreign exchange contract, currency swap agreement or other similar agreement designed to protect such Person against fluctuations in currency values.

        "Default" means any event which is, or after notice or passage of time or both would be, an Event of Default.

        "Disqualified Stock" means, with respect to any Person, any Capital Stock which by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable at the option of the holder) or upon the happening of any event:

in each case on or prior to the first anniversary of the Stated Maturity of the notes; provided, however, that any Capital Stock that would not constitute Disqualified Stock but for provisions thereof giving holders thereof the right to require such Person to purchase or redeem such Capital Stock upon the occurrence of an "asset sale" or "change of control" occurring prior to the first anniversary of the Stated Maturity of the notes shall not constitute Disqualified Stock if:

        The amount of any Disqualified Stock that does not have a fixed redemption, repayment or repurchase price will be calculated in accordance with the terms of such Disqualified Stock as if such Disqualified Stock were redeemed, repaid or repurchased on any date on which the amount of such Disqualified Stock is to be determined pursuant to the Indenture; provided, however, that if such Disqualified Stock could not be required to be redeemed, repaid or repurchased at the time of such determination, the redemption, repayment or repurchase price will be the book value of such Disqualified Stock as reflected in the most recent financial statements of such Person.

        "EBITDA" for any period means the sum of Consolidated Net Income, plus the following to the extent deducted in calculating such Consolidated Net Income:

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in each case for such period. Notwithstanding the foregoing, the provision for taxes based on the income or profits of, and the depreciation and amortization and non-cash charges of, a Restricted Subsidiary shall be added to Consolidated Net Income to compute EBITDA only to the extent (and in the same proportion, including by reason of minority interest) that the net income of such Restricted Subsidiary was included in calculating Consolidated Net Income and only if a corresponding amount would be permitted at the date of determination to be dividended to the Company by such Restricted Subsidiary without prior approval (that has not been obtained), pursuant to the terms of its charter and all agreements, instruments, judgments, decrees, orders, statutes, rules and governmental regulations applicable to such Restricted Subsidiary or its stockholders.

        "Exchange Act" means the U.S. Securities Exchange Act of 1934, as amended.

        "Existing notes" means the Company's 125/8% Senior Notes Due 2005 issued under an indenture dated as of August 1, 1995 among the Company, the guarantors named therein and Society National Bank, as trustee.

        "GAAP" means generally accepted accounting principles in the United States of America as in effect as of the Issue Date, including those set forth in:

        "Guarantee" means any obligation, contingent or otherwise, of any Person directly or indirectly guaranteeing any Indebtedness of any Person and any obligation, direct or indirect, contingent or otherwise, of such Person:

provided, however, that the term "Guarantee" shall not include endorsements for collection or deposit in the ordinary course of business. The term "Guarantee" used as a verb has a corresponding meaning.

        "Guaranty Agreement" means a supplemental indenture, in a form satisfactory to the Trustee, pursuant to which a Subsidiary Guarantor guarantees the Company's obligations with respect to the notes on the terms provided for in the Indenture.

        "Hedging Obligations" of any Person means the obligations of such Person pursuant to any Interest Rate Agreement or Currency Agreement.

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        "Holder" or "Noteholder" means the Person in whose name a note is registered on the Registrar's books.

        "Incur" means issue, assume, Guarantee, incur or otherwise become liable for; provided, however, that any Indebtedness or Capital Stock of a Person existing at the time such Person becomes a Restricted Subsidiary (whether by merger, consolidation, acquisition or otherwise) shall be deemed to be Incurred by such Person at the time it becomes a Restricted Subsidiary. The term "Incurrence" when used as a noun shall have a correlative meaning. Solely for purposes of determining compliance with " — Certain Covenants — Limitation on Indebtedness," the following will not be deemed to be the Incurrence of Indebtedness:

        "Indebtedness" means, with respect to any Person on any date of determination (without duplication):

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Notwithstanding the foregoing, in connection with the purchase by the Company or any Restricted Subsidiary of any business, the term "Indebtedness" will exclude post-closing payment adjustments to which the seller may become entitled to the extent such payment is determined by a final closing balance sheet or such payment depends on the performance of such business after the closing; provided, however, that, at the time of closing, the amount of any such payment is not determinable and, to the extent such payment thereafter becomes fixed and determined, the amount is paid within 30 days thereafter.

        The amount of Indebtedness of any Person at any date shall be the outstanding balance at such date of all unconditional obligations as described above and the maximum liability, upon the occurrence of the contingency giving rise to the obligation, of any contingent obligations at such date; provided, however, that in the case of Indebtedness sold at a discount, the amount of such Indebtedness at any time will be the accreted value thereof at such time.

        "Independent Qualified Party" means an investment banking firm, accounting firm or appraisal firm of national standing; provided, however, that such firm is not an Affiliate of the Company.

        "Interest Rate Agreement" means in respect of a Person any interest rate swap agreement, interest rate cap agreement or other financial agreement or arrangement designed to protect such Person against fluctuations in interest rates.

        "Investment" in any Person means any direct or indirect advance, loan (other than advances to customers in the ordinary course of business that are recorded as accounts receivable on the balance sheet of the lender) or other extensions of credit (including by way of Guarantee or similar arrangement) or capital contribution to (by means of any transfer of cash or other property to others or any payment for property or services for the account or use of others), or any purchase or acquisition of Capital Stock, Indebtedness or other similar instruments issued by such Person. Except as otherwise provided for herein, the amount of an Investment shall be its fair value at the time the Investment is made and without giving effect to subsequent changes in value.

        For purposes of the definition of "Unrestricted Subsidiary", the definition of "Restricted Payment" and the covenant described under " — Certain Covenants — Limitation on Restricted Payments:"

        "Issue Date" means the date on which the notes are originally issued.

        "Legal Holiday" means a Saturday, a Sunday or a day on which banking institutions are not required to be open in the State of New York.

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        "Lien" means any mortgage, pledge, security interest, encumbrance, lien or charge of any kind (including any conditional sale or other title retention agreement or lease in the nature thereof).

        "Net Available Cash" from an Asset Disposition means cash payments received therefrom (including any cash payments received by way of deferred payment of principal pursuant to a note or installment receivable or otherwise and proceeds from the sale or other disposition of any securities received as consideration, but only as and when received, but excluding any other consideration received in the form of assumption by the acquiring Person of Indebtedness or other obligations relating to such properties or assets or received in any other noncash form), in each case net of:

        "Net Cash Proceeds," with respect to any issuance or sale of Capital Stock or Indebtedness, means the cash proceeds of such issuance or sale net of attorneys' fees, accountants' fees, underwriters' or placement agents' fees, discounts or commissions and brokerage, consultant and other fees actually incurred in connection with such issuance or sale and net of taxes paid or payable as a result thereof.

        "Officer" means the Chairman of the Board, the President, any Vice President, the Treasurer or the Secretary of the Company.

        "Officers' Certificate" means a certificate signed by two Officers.

        "Opinion of Counsel" means a written opinion from legal counsel who is acceptable to the Trustee. The counsel may be an employee of or counsel to the Company or the Trustee.

        "Permitted Holders" means Ms. Rebecca Matthias and Mr. Dan Matthias.

        "Permitted Investment" means an Investment by the Company or any Restricted Subsidiary in:

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        "Permitted Liens" means, with respect to any Person:

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Notwithstanding the foregoing, "Permitted Liens" will not include any Lien described in clauses (8), (9), (12) or (13) above to the extent such Lien applies to any additional Assets acquired directly or indirectly from Net Available Cash pursuant to the covenant described under " — Certain Covenants — Limitation on Sales of Assets and Subsidiary Stock."

        "Person" means any individual, corporation, partnership, limited liability company, joint venture, association, joint-stock company, trust, unincorporated organization, government or any agency or political subdivision thereof or any other entity.

        "Preferred Stock," as applied to the Capital Stock of any Person, means Capital Stock of any class or classes (however designated) which is preferred as to the payment of dividends or distributions, or as to the distribution of assets upon any voluntary or involuntary liquidation or dissolution of such Person, over shares of Capital Stock of any other class of such Person.

        "principal" of a note means the principal of the note plus the premium, if any, payable on the note which is due or overdue or is to become due at the relevant time.

        "Public Equity Offering" means an underwritten primary public offering of common stock of the Company pursuant to an effective registration statement under the Securities Act, other than the public offering of 1,100,000 shares of the Company's common stock being conducted concurrently with the offering of the Notes pursuant to this prospectus.

        "Purchase Money Indebtedness" means any Indebtedness incurred by the Company or a Subsidiary Guarantor to finance the acquisition, construction of or repairs, improvements or additions to property or equipment, the principal amount of which Indebtedness does not exceed 100% of such cost and the maturity of which Indebtedness does not exceed the useful life of the property or equipment being financed; provided, however, that any Lien arising in connection with any such Indebtedness shall be limited to the specified asset(s) being financed or, in the case of real property or fixtures, including additions and improvements, the real property to which such asset(s) is attached; and provided further, however, that such Indebtedness is Incurred within 180 days after such acquisition by the Company or Subsidiary Guarantor.

        "Refinance" means, in respect of any Indebtedness, to refinance, extend, renew, refund, repay, prepay, redeem, defease or retire, or to issue other Indebtedness in exchange or replacement for, such Indebtedness. "Refinanced" and "Refinancing" shall have correlative meanings.

        "Refinancing Indebtedness" means Indebtedness that Refinances any Indebtedness of the Company or any Restricted Subsidiary existing on the Issue Date or Incurred in compliance with the Indenture, including Indebtedness that Refinances Refinancing Indebtedness; provided, however, that:

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and provided further, however, that Refinancing Indebtedness shall not include (A) Indebtedness of a Subsidiary that Refinances Indebtedness of the Company or (B) Indebtedness of the Company or a Restricted Subsidiary that Refinances Indebtedness of an Unrestricted Subsidiary.

        "Related Business" means any business in which the Company was engaged on the Issue Date and any business related, ancillary or complementary to any business of the Company in which the Company was engaged on the Issue Date.

        "Restricted Payment" with respect to any Person means:

        "Restricted Subsidiary" means any Subsidiary of the Company that is not an Unrestricted Subsidiary.

        "Sale/Leaseback Transaction" means an arrangement relating to property now owned or hereafter acquired whereby the Company or a Restricted Subsidiary transfers such property to a Person and the Company or a Restricted Subsidiary leases it from such Person.

        "SEC" means the U.S. Securities and Exchange Commission.

        "Securities Act" means the U.S. Securities Act of 1933, as amended.

        "Senior Indebtedness" means with respect to any Person:

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unless, in the case of clauses (1) and (2) above, in the instrument creating or evidencing the same or pursuant to which the same is outstanding, it is provided that such Indebtedness or other Obligations are subordinate in right of payment to the notes or the Subsidiary Guaranty of such Person, as the case may be; provided, however, that Senior Indebtedness shall not include:

        "Significant Subsidiary" means any Restricted Subsidiary that would be a "Significant Subsidiary" of the Company within the meaning of Rule 1-02 under Regulation S-X promulgated by the SEC.

        "Stated Maturity" means, with respect to any security, the date specified in such security as the fixed date on which the final payment of principal of such security is due and payable, including pursuant to any mandatory redemption provision (but excluding any provision providing for the repurchase of such security at the option of the holder thereof upon the happening of any contingency unless such contingency has occurred).

        "Subordinated Obligation" means, with respect to a Person, any Indebtedness of such Person (whether outstanding on the Issue Date or thereafter Incurred) which is subordinate or junior in right of payment to the notes or a Subsidiary Guaranty of such Person, as the case may be, pursuant to a written agreement to that effect.

        "Subsidiary" means, with respect to any Person, any corporation, association, partnership or other business entity of which more than 50% of the total voting power of shares of Voting Stock is at the time owned or controlled, directly or indirectly, by:

        "Subsidiary Guarantor" means Cave Springs, Inc., eSpeciality Brands, LLC, Dan Howard Industries, Inc. and Mother's Stores, Inc. and each other Subsidiary of the Company that executes the Indenture as a guarantor on the Issue Date and each other Subsidiary of the Company that thereafter guarantees the notes pursuant to the terms of the Indenture.

        "Subsidiary Guaranty" means a Guarantee by a Subsidiary Guarantor of the Company's obligations with respect to the notes.

        "Temporary Cash Investments" means any of the following:

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        "Trustee" means J.P. Morgan Trust Company, National Association, until a successor replaces it and, thereafter, means the successor.

        "Trust Indenture Act" means the Trust Indenture Act of 1939 (15 U.S.C. §§ 77aaa-77bbbb) as in effect on the Issue Date.

        "Trust Officer" means the Chairman of the Board, the President or any other officer or assistant officer of the Trustee assigned by the Trustee to administer its corporate trust matters.

        "U. S. Government Obligations" means direct obligations (or certificates representing an ownership interest in such obligations) of the United States of America (including any agency or instrumentality thereof) for the payment of which the full faith and credit of the United States of America is pledged and which are not callable at the issuer's option.

        "Unrestricted Subsidiary" means:

        The Board of Directors may designate any Subsidiary of the Company (including any newly acquired or newly formed Subsidiary) to be an Unrestricted Subsidiary unless such Subsidiary or any of its Subsidiaries owns any Capital Stock or Indebtedness of, or holds any Lien on any property of, the Company or any other Subsidiary of the Company that is not a Subsidiary of the Subsidiary to be so designated; provided, however, that either (A) the Subsidiary to be so designated has total assets of $1,000 or less or (B) if such Subsidiary has assets greater than $1,000, such designation would be permitted under the covenant described under " — Certain Covenants — Limitation on Restricted Payments."

        The Board of Directors may designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided, however, that immediately after giving effect to such designation (A) the Company could Incur $1.00 of additional Indebtedness under paragraph (a) of the covenant described under " — 

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Certain Covenants — Limitation on Indebtedness" and (B) no Default shall have occurred and be continuing. Any such designation by the Board of Directors shall be evidenced to the Trustee by promptly filing with the Trustee a copy of the resolution of the Board of Directors giving effect to such designation and an Officers' Certificate certifying that such designation complied with the foregoing provisions.

        "Voting Stock" of a Person means all classes of Capital Stock or other interests (including partnership interests or limited liability company units) of such Person then outstanding and normally entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof.

        "Wholly Owned Subsidiary" means a Restricted Subsidiary all the Capital Stock of which (other than directors' qualifying shares) is owned by the Company or one or more Wholly Owned Subsidiaries.

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MATERIAL U.S. FEDERAL TAX CONSIDERATIONS

        The following is a discussion of the material U.S. federal income tax consequences of the acquisition, ownership, and disposition of the notes to beneficial owners of the notes that are "U.S. holders," as defined below, and the material U.S. federal income and estate tax consequences of the acquisition, ownership, and disposition of the notes to beneficial owners of the notes that are "non-U.S. holders," as defined below. This discussion is based on currently existing provisions of the Internal Revenue Code of 1986, as amended (the "Code"), Treasury regulations promulgated thereunder, and administrative and judicial interpretations thereof, all as in effect on the date hereof and all of which are subject to change, possibly on a retroactive basis.

        This discussion applies only to initial beneficial owners that purchase the notes upon original issuance at the initial offering price set forth on the cover of this prospectus, and is limited to initial beneficial owners that hold the notes as capital assets (generally, property held for investment). Moreover, this discussion does not address all of the U.S. federal tax consequences that may be important to particular beneficial owners in light of their personal circumstances, or to certain types of beneficial owners. Such beneficial owners may include, for example, banks and other financial institutions, insurance companies, tax-exempt entities, dealers in securities, certain former citizens or former long-term residents of the United States, partnerships or other entities classified as partnerships or flow-through entities for U.S. federal income tax purposes, certain trusts, hybrid entities, persons holding the notes as part of a "hedging" or "conversion transaction," a "straddle," or other risk reduction transaction for U.S. federal income tax purposes, or U.S. holders that have a functional currency other than the U.S. dollar.

        This discussion does not address the tax consequences to non-U.S. holders that are subject to U.S. federal income tax on a net basis on income realized with respect to a note because such income is effectively connected with the conduct of a U.S. trade or business. Such holders are generally taxed in a similar manner to U.S. holders; however, certain special rules apply. In addition, this discussion does not include any description of the tax laws of any state, local or foreign government that may be applicable to a particular beneficial owner.

        As used herein, the term "U.S. holder" means a beneficial owner of a note that is, for U.S. federal income tax purposes,

        The term "non-U.S. holder" means a beneficial owner of a note that is not a U.S. holder.

        If a partnership is the beneficial owner of a note, the treatment of a partner in the partnership will generally depend upon the status of the partner and the activities of the partnership. A beneficial owner of notes that is a partnership and partners in such a partnership should consult their tax advisors about the U.S. federal tax consequences of the acquisition, ownership, and disposition of the notes.

        Prospective purchasers are urged to consult their own tax advisors as to the particular U.S. federal income and other tax consequences to them of the acquisition, ownership, and disposition of the notes, as well as the tax consequences under state, local, and foreign tax laws, and the possible effects of changes in tax laws.

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U.S. Federal Income Taxation of U.S. Holders

Payments of Interest

        In general, interest on a note will be taxable to a U.S. holder as ordinary income at the time it accrues, or is actually or constructively received, in accordance with the U.S. holder's regular method of accounting for U.S. federal income tax purposes.

Sale, Exchange or Retirement of the Notes

        Upon the sale, exchange, redemption, retirement at maturity or other taxable disposition of a note, a U.S. holder generally will recognize capital gain or loss equal to the difference between

        Capital gains of individuals derived in respect of capital assets held for more than one year are eligible for reduced rates of taxation. The deductibility of capital losses is subject to limitations.

Backup Withholding and Information Reporting

        In general, a U.S. holder will be subject to U.S. federal backup withholding tax at the applicable rate (currently 30%) with respect to interest, principal, or premium, if any, paid on a note, and the proceeds from the sale, exchange, redemption, or other disposition of a note, if the U.S. holder fails to provide its taxpayer identification number to the paying agent and comply with certain certification procedures or otherwise establish an exemption from backup withholding. In addition, such payments of interest, principal, or premium to, and the proceeds of a sale, redemption, or other disposition by, a U.S. holder that is not an exempt entity will generally be subject to information reporting requirements. The amount of any backup withholding from a payment to a U.S. holder will be allowed as a credit against such U.S. holder's U.S. federal income tax liability and may entitle such U.S. holder to a refund, provided the required information is furnished to the IRS.

U.S. Federal Income Taxation of Non-U.S. Holders

Payments of Interest

        In general, payments of interest on the notes to a non-U.S. holder that is not engaged in a business in the U.S. will not be subject to U.S. federal income tax provided that,

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        A non-U.S. holder may also be entitled to the benefits of an income tax treaty under which interest on the notes is subject to a reduced rate of withholding tax or is exempt from U.S. withholding tax, provided a properly executed IRS form W-8BEN claiming the exemption is furnished to us.

Sale, Exchange or Retirement of the Notes

        A non-U.S. holder that is not engaged in business in the U.S. generally will not be subject to U.S. federal income tax or any withholding thereof except as described below under " — Backup Withholding and Information Reporting" on gain realized on the sale, exchange, redemption, retirement at maturity, or other disposition of a note unless the non-U.S. holder is an individual who is present in the United States for a period or periods aggregating 183 or more days in the taxable year of the disposition and certain other conditions are met.

Backup Withholding and Information Reporting

        We must report annually to the IRS and to each non-U.S. holder the amount of interest paid to that holder and the tax withheld from those payments of interest. Copies of those information returns may also be made available to the tax authorities in the country in which the non-U.S. holder is a resident under the provisions of an applicable income tax treaty or agreement.

        A non-U.S. holder may be subject to additional information reporting or to backup withholding at the applicable rate (currently 30%) on these payments unless the certifications described in clause (3) under " — U.S. Federal Income Taxation of Non-U.S. Holders — Payments of Interest" above are received. The amount of any backup withholding paid to the IRS on behalf of a non-U.S. holder from a payment to a non-U.S. holder will be allowed as a credit against the non-U.S. holder's U.S. federal income tax liability (if any) and may entitle the non-U.S. holder to a refund, provided the required information is furnished to the IRS.

        Non-U.S. holders should consult their tax advisors regarding the application of information reporting and backup withholding in their particular situations, the availability of an exemption therefrom, and the procedure for obtaining such an exemption, if available.

Estate Tax

        Notes held at the time of death, or previously transferred subject to certain retained rights or powers, by an individual who at the time of death is not a citizen or resident of the United States (as specifically defined for U.S. federal estate tax purposes) will not be included in such holder's gross estate for U.S. federal estate tax purposes, provided that

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UNDERWRITING

        Under the terms and subject to the conditions contained in an underwriting agreement dated                        , 2002, we have agreed to sell to Credit Suisse First Boston Corporation and Fleet Securities, Inc. all of the principal amount of the notes.

Underwriter
  Principal Amount
Credit Suisse First Boston Corporation      
Fleet Securities, Inc.      
   
Total   $ 125,000,000
   

        The underwriting agreement provides that the underwriters are obligated to purchase from us all of the notes. The underwriting agreement also provides that if an underwriter defaults, the offering of notes may be terminated.

        The underwriters propose to offer the notes at the public offering price on the cover page of this prospectus and to selling group members at that price less a concession of     % of the principal amount per note. The underwriters and selling group members may allow a discount of    % of the principal amount per note on sales to other broker/dealers. After the public offering, the underwriters may change the public offering price and concession and discount to broker/dealers.

        The following table summarizes the compensation and estimated expenses we will pay:

 
  Per Note
  Total
Underwriting discounts and commissions paid by us        
Expenses payable by us        

        The notes are a new issue of securities with no established trading market. The underwriters intend to make a secondary market for the notes. However, the underwriters are not obligated to do so and may discontinue making a secondary market for the notes at any time without notice. No assurance can be given that a liquid trading market will develop or, if developed, that it will be maintained.

        We have agreed that we will not offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, any additional notes or securities convertible into or exchangeable or exercisable for any notes, enter into a transaction which would have the same effect, or enter into any swap, hedge or other arrangement that transfers, in whole or in part, any of the economic consequences of ownership of the notes, whether any such aforementioned transaction is to be settled by delivery of the notes or such other securities, in cash or otherwise, or publicly disclose the intention to make any such offer, sale, pledge or disposition, or to enter into any such transaction, swap, hedge or other arrangement, without, in each case, the prior written consent of Credit Suisse First Boston Corporation for a period of 90 days after the date of this prospectus.

        We have agreed to indemnify the underwriters against liabilities under the Securities Act, or contribute to payments which the underwriters may be required to make in that respect.

        Fleet Capital Corporation, an affiliate of Fleet Securities, Inc., is a lender under our existing credit facility and will receive repayments of amounts owed to them under the credit facility from the net proceeds of this offering and the concurrent equity offering as described in "Use of Proceeds."

        In connection with the offering, the underwriters may engage in stabilizing transactions, syndicate covering transactions and penalty bids in accordance with Regulation M under the Exchange Act.

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These stabilizing transactions, syndicate covering transactions and penalty bids may have the effect of raising or maintaining the market price of the notes or preventing or retarding a decline in the market price of the notes. As a result, the price of the notes may be higher than the price that might otherwise exist in the open market. These transactions, if commenced, may be discontinued at any time.


NOTICE TO CANADIAN RESIDENTS

Resale Restrictions

        The distribution of the notes in Canada is being made only on a private placement basis exempt from the requirement that we prepare and file a prospectus with the securities regulatory authorities in each province where trades of notes are made. Any resale of the notes in Canada must be made under applicable securities laws which will vary depending on the relevant jurisdiction, and which may require resales to be made under available statutory exemptions or under a discretionary exemption granted by the applicable Canadian securities regulatory authority. Purchasers are advised to seek legal advice prior to any resale of the notes.

Representations of Purchasers

        By purchasing the notes in Canada and accepting a purchase confirmation, a purchaser is representing to us and the dealer from whom the purchase confirmation is received, that

Rights of Action Ontario Purchasers Only

        Under Ontario securities legislation, a purchaser who purchases a security offered by this prospectus during the period of distribution will have a statutory right of action for damages, or while still the owner of the notes, for rescission against us in the event that this prospectus contains a misrepresentation. A purchaser will be deemed to have relied on the misrepresentation. The right of action for damages is exercisable not later than the earlier of 180 days from the date the purchaser first had knowledge of the facts giving rise to the cause of action and three years from the date on which payment is made for the notes. The right of action for rescission is exercisable not later than 180 days from the date on which payment is made for the notes. If a purchaser elects to exercise the right of action for rescission, the purchaser will have no right of action for damages against us. In no case will the amount recoverable in any action exceed the price at which the notes were offered to the purchaser and if the purchaser is shown to have purchased the securities with knowledge of the misrepresentation, we will have no liability. In the case of an action for damages, we will not be liable for all or any portion of the damages that are proven to not represent the depreciation in value of the notes as a result of the misrepresentation relied upon. These rights are in addition to, and without derogation from, any other rights or remedies available at law to an Ontario purchaser. The foregoing is a summary of the rights available to an Ontario purchaser. Ontario purchasers should refer to the complete text of the relevant statutory provisions.

97


Enforcement of Legal Rights

        All of our directors and officers as well as the experts named herein may be located outside of Canada and, as a result, it may not be possible for Canadian purchasers to effect service of process within Canada upon us or those persons. All or a substantial portion of our assets and the assets of those persons may be located outside of Canada and, as a result, it may not be possible to satisfy a judgment against us or those persons in Canada or to enforce a judgment obtained in Canadian courts against us or those persons outside of Canada.

Taxation and Eligibility for Investment

        Canadian purchasers of notes should consult their own legal and tax advisors with respect to the tax consequences of an investment in the notes in their particular circumstances and about the eligibility of the notes for investment by the purchaser under relevant Canadian legislation.

Relationship with Affiliates of Certain Underwriters

        We are in compliance with the terms of the indebtedness owed by us to Fleet Capital Corporation, an affiliate of Fleet Securities, Inc. The decision of Fleet Securities, Inc. to distribute the notes was not influenced by its affiliate that is a lender to us and such affiliate had no involvement in determining whether or when to distribute the notes under this offering or the terms of this offering. Fleet Securities, Inc. will not receive any benefit from this offering other than the underwriting discounts and commissions paid by us.


LEGAL MATTERS

        Pepper Hamilton LLP will pass upon the validity of the notes being offered hereby for us. Certain matters relating to the notes will be passed upon for the underwriter by Dewey Ballantine LLP, New York, New York.

        One of our directors and the Chairman of our Audit Committee, Elam M. Hitchner, III, is a partner in the law firm of Pepper Hamilton LLP and, as of the date of this prospectus, owns 40,500 common shares and holds options to purchase 18,000 shares that are presently exercisable. Mr. Hitchner is a selling stockholder in the concurrent equity offering.


EXPERTS

        The consolidated financial statements of Mothers Work and its subsidiary as of September 30, 2001 and 2000, and for each of the years in the two-year period ended September 30, 2001 have been included herein in reliance upon the report of KPMG LLP, independent auditors, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing.

        The financial statements of Mothers Work and its subsidiary for the year ended September 30, 1999 included and incorporated by reference in this prospectus have been audited by Arthur Andersen LLP, our former independent auditors, as stated in their report, which is included and incorporated by reference herein. Arthur Andersen LLP has not consented to the inclusion of its report in this prospectus. Because Arthur Andersen LLP has not consented to the inclusion of its report in this prospectus, it may be more difficult for you to seek remedies against Arthur Andersen LLP and your ability to obtain relief against Arthur Andersen LLP may be impaired. On June 4, 2002, we dismissed Arthur Andersen LLP as our independent public accountants and on June 6, 2002, we engaged KPMG LLP as our independent public accountants.

        The financial statements of eSpeciality Brands, LLC and subsidiaries, as of January 27, 2001 and for the period ended January 27, 2001 incorporated by reference in this prospectus have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report, which is incorporated by reference herein, and has been so incorporated in reliance upon the report of such firm given upon their authority as experts in accounting and auditing.

98



WHERE YOU CAN FIND ADDITIONAL INFORMATION

        We file reports, proxy statements and other information with the Securities and Exchange Commission, or the SEC, in accordance with the Securities Exchange Act of 1934, as amended. You may read and copy our reports, proxy statements and other information filed by us at the public reference facilities maintained by the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the SEC's regional offices at 233 Broadway, New York, NY 10279 and 175 W. Jackson Boulevard, Suite 900, Chicago, Illinois 60604. Please call the SEC at 1-800-SEC-0330 for further information about the public reference rooms. Our reports, proxy statements and other information filed with the SEC are also available to the public over the Internet at the SEC's website at http://www.sec.gov.


INCORPORATION OF DOCUMENTS BY REFERENCE

        The SEC allows us to "incorporate by reference" the information we file with them, which means that we can disclose important information to you by referring you to those documents. The information incorporated by reference is considered to be a part of this prospectus, and information that we file later with the SEC will automatically update and supersede this information. We incorporate by reference the following documents we have filed, or may file, with the SEC:

        Any statement contained in a document that is incorporated by reference shall be deemed to be modified or superseded for all purposes to the extent that a statement contained in this prospectus (or in any other document that is subsequently filed with the SEC and incorporated by reference) modifies or replaces such statement. Any statement so modified or superseded shall not be deemed a part of this prospectus except as so modified or superseded.

        You may request a copy of these filings, at no cost, by writing or telephoning us at the following address: Investor Relations, Mothers Work, Inc., 456 North Fifth Street, Philadelphia, Pennsylvania 19123, telephone (215) 873-2200.

99




INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

MOTHERS WORK, INC. AND SUBSIDIARIES

 
  Page
Report of KPMG LLP, Independent Auditors   F-2

Report of Arthur Andersen LLP, Independent Public Accountants

 

F-3

Consolidated Balance Sheets at September 30, 2001 and 2000

 

F-4

Consolidated Statements of Operations for the fiscal years ended September 30, 2001, 2000 and 1999

 

F-5

Consolidated Statements of Stockholders' Equity for the fiscal years ended September 30, 2001, 2000 and 1999

 

F-6

Consolidated Statements of Cash Flows for the fiscal years ended September 30, 2001, 2000 and 1999

 

F-7

Notes to Consolidated Financial Statements

 

F-8

Consolidated Balance Sheets at March 31, 2002 (unaudited) and September 30, 2001

 

F-30

Consolidated Statements of Operations for the three and six months ended March 31, 2002 and 2001 (unaudited)

 

F-31

Consolidated Statements of Cash Flows for the six months ended March 31, 2002 and 2001 (unaudited)

 

F-32

Notes to Unaudited Consolidated Financial Statements

 

F-33

F-1



INDEPENDENT AUDITORS' REPORT

The Board of Directors
Mothers Work, Inc.;

        We have audited the accompanying consolidated balance sheets of Mothers Work, Inc. and subsidiary as of September 30, 2001 and 2000, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the two-year period ended September 30, 2001. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

        We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Mothers Work, Inc. and subsidiary as of September 30, 2001 and 2000, and the results of their operations and their cash flows for each of the years in the two-year period ended September 30, 2001, in conformity with accounting principles generally accepted in the United States of America.

Philadelphia, Pennsylvania
July 2, 2002

F-2


        THE FOLLOWING REPORT OF ARTHUR ANDERSEN LLP IS A COPY OF A PREVIOUSLY ISSUED REPORT THAT HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP. THE REPORT OF KPMG LLP INCLUDED IN THIS PROSPECTUS RELATES TO EACH OF THE YEARS IN THE TWO-YEAR PERIOD ENDED SEPTEMBER 30, 2001. CONSEQUENTLY, FOR THE PURPOSES OF THIS PROSPECTUS, THE FOLLOWING REPORT OF ARTHUR ANDERSEN LLP, WHICH IS THE MOST RECENTLY ISSUED REPORT, RELATES ONLY TO THE YEAR ENDED SEPTEMBER 30, 1999.


REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Mothers Work, Inc.:

        We have audited the accompanying consolidated balance sheets of Mothers Work, Inc. (a Delaware corporation) and subsidiary as of September 30, 2001 and 2000, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended September 30, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

        We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Mothers Work, Inc. and subsidiary as of September 30, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2001, in conformity with accounting principles generally accepted in the United States.

Philadelphia, Pennsylvania
November 2, 2001

F-3



MOTHERS WORK, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(in thousands, except share amounts)

 
  September 30,
 
 
  2001
  2000
 
ASSETS              
Current Assets              
  Cash and cash equivalents   $ 10,358   $ 3,076  
  Trade receivables     4,726     3,833  
  Inventories     73,090     75,747  
  Deferred income taxes     2,278     3,851  
  Prepaid expenses and other current assets     4,404     3,040  
   
 
 
    Total current assets     94,856     89,547  
Property, Plant and Equipment, net     46,025     44,260  
Other Assets              
  Goodwill, net of accumulated amortization of $14,355 and $12,300     29,886     32,093  
  Deferred financing costs, net of accumulated amortization of $2,788 and $2,289     1,640     2,139  
  Other intangible assets, net of accumulated amortization of $1,952 and $2,144     1,295     1,045  
  Deferred income taxes     10,858     9,821  
  Other non-current assets     617     681  
   
 
 
    Total other assets     44,296     45,779  
   
 
 
    $ 185,177   $ 179,586  
   
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY              
Current Liabilities              
  Line of credit   $ 32,229   $ 30,548  
  Current portion of long-term debt     434     543  
  Accounts payable     13,244     15,445  
  Accrued expenses and other current liabilities     16,440     13,327  
   
 
 
    Total current liabilities     62,347     59,863  
Long-Term Debt     96,179     96,088  
Accrued Dividends on Preferred Stock     7,055     6,037  
Deferred Rent     4,855     4,848  
Commitments and Contingencies (Note 11)              
Stockholders' Equity              
Preferred stock, 2,000,000 shares authorized              
    Series A cumulative convertible preferred stock, $.01 par value, $280.4878 stated value, 41,000 shares authorized and issued, 38,409 and 41,000 shares outstanding, respectively (liquidation value of $17,828 and $17,537, respectively)     10,773     11,500  
    Series B junior participating preferred stock, $.01 par value, 10,000 shares authorized, none outstanding          
  Common stock, $.01 par value, 10,000,000 shares authorized, 3,480,122 and 3,451,770 shares issued and outstanding, respectively     35     34  
  Additional paid-in-capital     26,949     26,203  
  Accumulated deficit     (23,016 )   (24,987 )
   
 
 
    Total stockholders' equity     14,741     12,750  
   
 
 
    $ 185,177   $ 179,586  
   
 
 

The accompanying notes are an integral part of these consolidated financial statements.

F-4



MOTHERS WORK, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

 
  Year Ended September 30,
 
 
  2001
  2000
  1999
 
Net sales   $ 388,306   $ 366,283   $ 299,735  
Cost of goods sold     194,320     183,300     150,402  
   
 
 
 
  Gross profit     193,986     182,983     149,333  
Selling, general and administrative expenses     172,795     157,809     127,390  
   
 
 
 
  Operating income     21,191     25,174     21,943  
Interest expense     (14,867 )   (15,877 )   (15,132 )
Other income     594          
   
 
 
 
  Income before income taxes     6,918     9,297     6,811  
Income tax provision     3,456     4,249     3,424  
   
 
 
 
Net income     3,462     5,048     3,387  
Dividends on preferred stock     1,491     1,389     1,251  
   
 
 
 
Net income available to common stockholders   $ 1,971   $ 3,659   $ 2,136  
   
 
 
 
Income per share — Basic   $ 0.57   $ 1.06   $ 0.60  
   
 
 
 
Average shares outstanding — Basic     3,456     3,443     3,538  
   
 
 
 
Income per share — Diluted   $ 0.55   $ 1.01   $ 0.57  
   
 
 
 
Average shares outstanding — Diluted     3,605     3,641     3,754  
   
 
 
 

The accompanying notes are an integral part of these consolidated financial statements.

F-5



MOTHERS WORK, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(in thousands)

 
  Series A
Cumulative
Convertible
Preferred
Stock

  Common Stock
   
   
   
 
 
  Number
of Shares

  Amount
  Additional
Paid-in
Capital

  Accumulated
Deficit

  Total
 
Balance September 30, 1998   $ 11,500   3,598   $ 36   $ 27,996   $ (30,782 ) $ 8,750  
  Exercise of stock options       35         209         209  
  Purchase and retirement of common stock       (187 )   (2 )   (2,025 )       (2,027 )
  Preferred stock dividends                   (1,251 )   (1,251 )
  Net income                   3,387     3,387  
   
 
 
 
 
 
 
Balance September 30, 1999     11,500   3,446     34     26,180     (28,646 )   9,068  
  Exercise of stock options       24         202         202  
  Purchase and retirement of common stock       (18 )       (179 )       (179 )
  Preferred stock dividends                   (1,389 )   (1,389 )
  Net income                   5,048     5,048  
   
 
 
 
 
 
 
Balance September 30, 2000     11,500   3,452     34     26,203     (24,987 )   12,750  
  Exercise of stock options       2         20         20  
  Preferred stock conversions     (727 ) 26     1     726          
  Preferred stock dividends                   (1,491 )   (1,491 )
  Net income                   3,462     3,462  
   
 
 
 
 
 
 
Balance September 30, 2001   $ 10,773   3,480   $ 35   $ 26,949   $ (23,016 ) $ 14,741  
   
 
 
 
 
 
 

The accompanying notes are an integral part of these consolidated financial statements.

F-6



MOTHERS WORK, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 
  Year Ended September 30,
 
 
  2001
  2000
  1999
 
Cash Flows from Operating Activities                    
  Net income   $ 3,462   $ 5,048   $ 3,387  
  Adjustments to reconcile net income to net cash provided by operating activities:                    
    Depreciation and amortization     11,915     11,951     10,516  
    Accretion of discount on Notes     194     173     150  
    Deferred taxes     536     4,136     957  
    Amortization of deferred financing costs     499     481     498  
    Provision for deferred rent     7     556     473  
    Loss on impairment of long-lived assets     64          
  Changes in assets and liabilities:                    
    Decrease (increase) in —                    
      Receivables     (893 )   (1,263 )   406  
      Inventories     2,657     (793 )   (13,277 )
      Prepaid expenses and other assets     (1,300 )   28     3,814  
    Increase (decrease) in —                    
      Accounts payable, accrued expenses and other current liabilities     2,366     (1,694 )   (6,496 )
   
 
 
 
  Net cash provided by operating activities     19,507     18,623     428  
   
 
 
 
Cash Flows from Investing Activities                    
  Capital expenditures     (12,212 )   (13,619 )   (10,087 )
  Disposal of fixed assets     639          
  Purchase of intangible assets     (554 )   (209 )   (219 )
   
 
 
 
  Net cash used in investing activities     (12,127 )   (13,828 )   (10,306 )
   
 
 
 
Cash Flows from Financing Activities                    
  Increase (decrease) in line of credit and cash overdrafts, net     425     (2,173 )   9,591  
  Repurchase of common stock         (179 )   (2,026 )
  Repayment of long-term debt     (543 )   (709 )   (379 )
  Proceeds from exercise of options     20     202     209  
   
 
 
 
  Net cash (used in) provided by financing activities     (98 )   (2,859 )   7,395  
   
 
 
 
Net Increase (Decrease) in Cash and Cash Equivalents     7,282     1,936     (2,483 )
Cash and Cash Equivalents, Beginning of Year     3,076     1,140     3,623  
   
 
 
 
Cash and Cash Equivalents, End of Year   $ 10,358   $ 3,076   $ 1,140  
   
 
 
 

The accompanying notes are an integral part of these consolidated financial statements.

F-7



MOTHERS WORK, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

        Mothers Work, Inc., incorporated in Delaware in 1982, is a specialty retailer and manufacturer of maternity clothing. The Company operated 771 retail store locations at September 30, 2001, including 132 leased departments, throughout the United States.

        The accompanying consolidated financial statements include the accounts of Mothers Work, Inc. and its wholly-owned subsidiary, Cave Springs, Inc. (collectively "Mothers Work" or the "Company"), as of September 30, 2001. All significant intercompany transactions and accounts have been eliminated in consolidation.

        On October 17, 2001, the Company completed the acquisition of eSpecialty Brands, LLC ("iMaternity") (see Note 12).

        The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

        Cash and cash equivalents include cash on hand and cash in the bank. Cash overdrafts of $2,426,000 and $3,682,000 are included in accounts payable at September 30, 2001 and 2000, respectively. The Company considers investments with an original maturity of three months or less when purchased to be cash equivalents.

        The Company maintains cash accounts that, at times, may exceed federally insured limits. The Company has not experienced any losses from maintaining cash accounts in excess of such limits. Management believes that it is not exposed to any significant credit risks on its cash accounts.

        Inventories are valued at the lower of cost or market. Cost is determined by the "first-in, first-out" (FIFO) method. Inventories manufactured by the Company include the cost of materials, freight, direct labor, manufacturing and distribution overhead.

        The Company expenses the costs of advertising when the advertising occurs, except for the costs associated with catalogs and brochures. The production costs for catalogs and brochures are deferred and amortized over a three to six month period corresponding to the expected period in which these items will be mailed. Advertising and catalog expenses were $7,212,000, $6,953,000 and $6,479,000 in fiscal 2001, 2000 and 1999, respectively.

F-8


        Property, plant and equipment are stated at cost. Depreciation and amortization are computed for financial reporting purposes on a straight-line basis, using service lives ranging principally from five to ten years for furniture and equipment and forty years for the building. Leasehold improvements are amortized over the shorter of the estimated useful life or the lease term. The cost of assets sold or retired and the related accumulated depreciation or amortization are removed from the accounts with any resulting gain or loss included in net income. Maintenance and repairs are expensed as incurred except for the capitalization of major renewals and betterments that extend the life of the asset. Long-lived assets are reviewed for impairment whenever adverse events or changes in circumstances or business climate indicate that the carrying value may not be recoverable. Factors used in the valuation include, but are not limited to, management's plans for future operations, brand initiatives, recent operating results and projected cash flows. If the associated undiscounted cash flows are insufficient to support the recorded asset, an impairment is recognized to reduce the carrying value of the asset. The amount of the impairment loss is determined by comparing the discounted expected future cash flows with the carrying value. At September 30, 2001, management believes that no reductions to the remaining useful lives or additional write-downs of long-lived assets are necessary.

        Goodwill represents the excess of the cost over the fair value of net assets acquired in business combinations. Goodwill is amortized using the straight-line method over a period of 20 years. Leasehold interests and other intangible assets are amortized over the lease term and five to ten years, respectively. Amortization of goodwill, leasehold interests and other intangible assets was $2,422,000, $2,494,000 and $2,451,000 in fiscal 2001, 2000 and 1999, respectively. Management reviews the carrying amount of goodwill, leasehold interests and other intangible assets at each balance sheet date to assess the continued recoverability based on future undiscounted cash flows and operating results from the related asset, future asset utilization and changes in market conditions. At September 30, 2001, management does not believe that there has been any impairment to the carrying value of goodwill, leasehold interests and other intangible assets.

        Deferred financing costs are amortized over the term of the related debt using the effective interest method. Amortization of deferred financing costs was $499,000, $481,000 and $498,000 in fiscal 2001, 2000 and 1999, respectively, and is included in interest expense in the accompanying Consolidated Statements of Operations.

        Rent expense on operating leases is recorded on a straight-line basis over the term of the lease. The net excess of rent expense over the actual cash paid has been recorded as deferred rent in the accompanying Consolidated Balance Sheets.

        Cash and cash equivalents, trade receivables, accounts payable and accrued expenses are reflected at fair value in the accompanying consolidated financial statements due to the short-term nature of

F-9


those instruments. The carrying amounts of long-term debt and capitalized lease obligations approximate fair value at the balance sheet dates based on the fair market value for similar instruments.

        Revenue is recognized at the point of sale for retail store sales, including leased department sales, or when merchandise is shipped to customers for Internet and mail order sales.

        The Company utilizes the asset and liability method of accounting for income taxes as prescribed by Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period that includes the enactment date.

        The Company accounts for stock-based compensation under the provisions of Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees." The Company has adopted the disclosure requirements of SFAS No. 123, "Accounting for Stock-Based Compensation."

        Basic earnings per share is computed by dividing net income available to common stockholders by the weighted average number of outstanding common shares. Diluted earnings per share is computed based upon the weighted average number of outstanding common shares, after giving effect to the potential dilutive effect from the assumed exercise of stock options and warrants as well as the assumed conversion of dilutive preferred stock and subordinated notes (see Note 7).

        The following summarizes those effects for the diluted earnings per share calculation (in thousands):

 
  2001
  2000
  1999
Average number of shares — Basic   3,456   3,443   3,538
Incremental shares from the assumed exercise of outstanding stock options and warrants   149   198   216
   
 
 
Average number of shares — Diluted   3,605   3,641   3,754
   
 
 

        Options to purchase 499,955 shares were outstanding at September 30, 2001, but were not included in the computation of diluted earnings per share, as their effect would have been antidilutive. Additionally, the assumed conversion of the Company's Series A Cumulative Convertible Preferred Stock (the "Series A Preferred Stock"), which was convertible into 384,090 and 410,000 shares of common stock at September 30, 2001 and 2000, respectively, was determined to be antidulitive for all

F-10



periods presented. The assumed conversion of the Company's subordinated notes, which were issued in fiscal 2001 (see Note 7) and were convertible into approximately 33,100 shares of common stock at September 30, 2001, were also determined to be antidilutive.

        In fiscal 2001, 2000 and 1999, the Company paid interest of $14,288,000, $15,127,000 and $14,919,000, respectively, and made tax payments of $394,000, $494,000 and $28,000, respectively. Capital lease obligations totaling $511,000 were incurred with respect to new equipment leases in fiscal 2000 (none for fiscal 2001 and 1999).

        Certain prior year balances in the financial statements have been reclassified to conform with the current year presentation.

        The Company records the costs of computer software, inclusive of website development costs, in accordance with Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Development or Obtained for Internal Use" issued by the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants. This statement requires that certain internal-use computer software costs be capitalized and amortized over the useful life of the asset. In fiscal 2001, the Company capitalized approximately $177,000 of costs related to the development of internal-use software. In fiscal 2000 and 1999, the Company expended an immaterial amount for the development of software for internal use. Accordingly, these costs were expensed as incurred during fiscal 2000 and 1999.

        The Company includes shipping and handling revenue earned from its catalog and e-commerce activities in net sales. Shipping and handling costs, which are included in cost of goods sold in the accompanying Consolidated Statements of Operations, include shipping supplies, related labor costs and third-party shipping costs.

        During the fourth quarter of fiscal 2001, the Company negotiated buy-outs of two lease arrangements in connection with the planned closure of these stores. Due to the level of the rental rates, the Company recognized income from the proceeds being paid under these buy-out agreements of $1.2 million in the aggregate and wrote off related leasehold improvements and other costs of $639,000, resulting in a net gain of $594,000, which is included in other income in the accompanying Consolidated Statements of Operations.

        Financial instruments, primarily cash and cash equivalents and accounts receivable, potentially subject the Company to concentrations of credit risk. The Company would limit its credit risk

F-11


associated with cash and cash equivalents by placing such investments in highly liquid funds. Receivables associated with third-party credit cards are processed by financial institutions which are monitored for financial stability. The Company is dependent on key suppliers to provide sufficient quantities of inventory at competitive prices. No single supplier represented 10% or more of net purchases in fiscal 2001, 2000 and 1999. Approximately 45% of the Company's purchases were imported from 26 countries during fiscal 2001. Management believes that any event causing a disruption of imports from any specific country could be mitigated through movement of production to readily alternative sources.

        In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS No. 141 also specifies the criteria applicable to intangible assets acquired in a purchase method business combination in order for them to be recognized and reported apart from goodwill. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually. SFAS No. 142 further requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values and be reviewed for impairment.

        The Company adopted SFAS Nos. 141 and 142 effective October 1, 2001. In adopting SFAS No. 142, the Company no longer amortizes goodwill. The following table reflects the adjustment to exclude goodwill amortization expense recognized in the prior periods as presented (in thousands, except per share amounts):

 
  For the
Year Ended
September 30,

 
  2001
  2000
Reported net income   $ 3,462   $ 5,048
  Add back goodwill amortization     2,207     2,216
   
 
  Adjusted net income     5,669     7,264
  Dividends on preferred stock     1,491     1,389
   
 
  Adjusted net income available to common stockholders   $ 4,178   $ 5,875
   
 

Income per share—basic:

 

 

 

 

 

 
  Reported net income   $ 0.57   $ 1.06
  Goodwill amortization     0.64     0.65
   
 
  Adjusted net income   $ 1.21   $ 1.71
   
 
Income per share—diluted:            
  Reported net income   $ 0.55   $ 1.01
  Goodwill amortization     0.61     0.60
   
 
  Adjusted net income   $ 1.16   $ 1.61
   
 

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        As of October 1, 2001, management determined that the Company had one reporting unit for purposes of applying SFAS No. 142 based on its reporting structure. The Company has made the initial assessment of impairment for the transition period as of October 1, 2001. The fair value of the Company's single reporting unit was determined based on the then fair market value of the Company's outstanding common stock on a control basis. Based on this initial assessment, no impairment loss was recognized. The Company plans to perform an annual assessment for goodwill impairment at the end of each fiscal year or as impairment indicators arise. The only changes to the carrying value of goodwill during fiscal 2001 and 2000 were due to amortization expense.

        Other intangible assets at September 30, 2001 and 2000 of $1,295,000 and $1,045,000, respectively, primarily represent lease acquisition costs, which are amortized over the life of the related lease. The Company has not identified any unamortizable intangible assets. Aggregate amortization expense in fiscal 2001 and 2000 was $215,000 and $278,000, respectively. Estimated amortization expense for the next five fiscal years is as follows (in thousands).


Fiscal Year

   
2002   $ 310
2003   $ 232
2004   $ 200
2005   $ 174
2006   $ 150

        In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 is effective for fiscal year beginning after June 15, 2002, and addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. Although early adoption is encouraged, the Company plans to adopt this statement in fiscal 2003. Adoption of SFAS No. 143 is not expected to have a material impact on the Company's financial position or results of operations.

        In August 2001, FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which establishes a single accounting model, based on the framework established in SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of," and resolves significant implementation issues related to SFAS No. 121. SFAS No. 144 superceded SFAS No. 121 and APB Opinion No. 30, "Reporting the Results of Operations — Reporting the Effects of a Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." The Company is required to adopt SFAS No. 144 for the fiscal year ending September 30, 2003, however, early application is permitted. Management does not believe that the adoption of SFAS No. 144 will have a material impact on the Company's financial position or results of operations.

2. INVENTORIES

        Inventories at September 30 were as follows (in thousands):

 
  2001
  2000
Finished goods   $ 61,535   $ 60,871
Work-in-progress     3,486     5,570
Raw materials     8,069     9,306
   
 
    $ 73,090   $ 75,747
   
 

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3. PROPERTY, PLANT AND EQUIPMENT, NET

        Property, plant and equipment at September 30 was comprised of the following (in thousands):

 
  2001
  2000
 
Land   $ 1,400   $ 1,400  
Building and improvements     10,834     10,443  
Furniture and equipment     27,166     24,067  
Leasehold improvements     57,726     51,399  
   
 
 
      97,126     87,309  
Less: accumulated depreciation and amortization     (51,101 )   (43,049 )
   
 
 
    $ 46,025   $ 44,260  
   
 
 

        During fiscal 2001, the Company recorded charges under SFAS No. 121 of approximately $64,000 related to the impairment of leasehold improvements and furniture and equipment at one store location.

4. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

        At September 30, accrued expenses and other current liabilities were comprised of the following (in thousands):

 
  2001
  2000
Salaries, wages and employee benefits   $ 5,274   $ 5,078
Income taxes payable     2,308    
Interest     2,179     2,293
Sales taxes     1,763     1,738
Insurance     961     232
Rent     676     1,527
Audit and legal     648     39
Restructuring costs (see Note 13)     128     250
Other     2,503     2,170
   
 
    $ 16,440   $ 13,327
   
 

5. LINE OF CREDIT

        The Company's primary sources of working capital consist of cash flows from operations and borrowings under its $56.0 million credit facility (the "Credit Facility"). The Credit Facility was amended and restated in April 2000 to increase borrowings to the current level, to raise the annual capital expenditure limitation, and to extend the maturity until September 15, 2004. The interest rate on direct borrowings outstanding is based on the prime rate of the Company's lender plus 25 basis points. At any time, the Company at its option may elect an alternative rate for all or part of the direct borrowings outstanding at LIBOR plus 225 basis points. The blended rate at September 30, 2001 was 5.5%. Amounts available for direct borrowings (net of letters of credit outstanding) are limited to the lesser of (a) the unused portion of the Credit Facility or (b) the Aggregate Adjusted Availability ("AAA"), as defined in the agreement as a percentage of eligible inventory and trade receivables. The

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Credit Facility is secured by a security interest in the Company's inventory, equipment, fixtures and cash. The facility has no financial covenants provided that the AAA does not fall below $10.0 million. In such event, the Company must achieve a Minimum Cash Flow, as defined, of not less than zero. At September 30, 2001, there were $32.2 million of direct borrowings, $4.1 million of outstanding letters of credit, an AAA of $23.9 million ($18.5 million at September 30, 2000) and available borrowings of $15.9 million. The Company was in compliance with all non-financial covenants per the agreement. In fiscal 2001, 2000 and 1999, the weighted average interest rates on the Credit Facility were 7.5%, 8.6% and 8.1%, respectively. In October 2001, the Credit Facility was amended and restated primarily to increase the collateral base to include the assets acquired in the acquisition of iMaternity (see Note 12).

        In addition to borrowings and letters of credit available under the Credit Facility, the Company has a $3.4 million standby letter of credit that collateralizes an Industrial Revenue Bond and a $1.0 million letter of credit that collaterizes a government mortgage note (see Note 6).

6. LONG-TERM DEBT

        The following table summarizes the Company's long-term debt at September 30 (in thousands):

 
  2001
  2000
 
125/8% Senior Unsecured Exchange Notes Due 2005 (net of unamortized discount)   $ 90,984   $ 90,790  
Industrial Revenue Bond, interest is variable (3.4% at September 30, 2001), principal due annually through 2020 (collateralized by a $3.4 million standby letter of credit)     3,430     3,535  
Government Mortgage Notes:              
Interest at 3.0%, principal due monthly until 2011 (collateralized by a $1.0 million letter of credit and a second mortgage on certain property and equipment at the Company's headquarters)     1,389     1,511  
Interest at 2.0%, principal due monthly until 2011 (collateralized by certain equipment at the Company's headquarters)     200     219  
Interest at 4.25%, principal due monthly until 2001 (collateralized by certain equipment at the Company's headquarters)         32  
Capital lease obligations     279     544  
Subordinated notes, interest at prime (5.0% at September 30, 2001), no expiration     331      
   
 
 
      96,613     96,631  
Less: current maturities     (434 )   (543 )
   
 
 
    $ 96,179   $ 96,088  
   
 
 

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        Long-term debt maturities as of September 30, 2001 are as follows (in thousands):

2002   $ 434  
2003     700  
2004     279  
2005     92,288  
2006     298  
2007 and thereafter     3,630  
   
 
      97,629  
Less: unamortized discount     (1,016 )
   
 
    $ 96,613  
   
 

        In connection with the acquisition of Motherhood on August 1, 1995, the Company sold 125/8% Senior Unsecured Exchange Notes Due 2005 (the "Notes") with a face amount of $92 million. The Notes were issued at 97.934% of their face amount, resulting in an annual effective interest rate of 13.0%. Interest on the Notes is payable semiannually in cash on February 1 and August 1. The Notes were issued by Mothers Work and are unconditionally guaranteed on a senior basis by its subsidiary (see Note 14). The Notes are redeemable at the option of the Company, in whole or in part, at any time on or after August 1, 2000, at 106.25% of their face amount, plus accrued and unpaid interest, declining ratably to 100% of their face amount on and after August 1, 2002, plus accrued and unpaid interest. In November 1995, the Company completed an exchange offer whereby the Notes were exchanged for 125/8% Senior Unsecured Exchange Notes Due 2005 which have been registered under the Securities Act of 1933.

        The Notes impose certain limitations on the ability of the Company to, among other things, incur additional indebtedness, pay dividends and enter into certain types of transactions. The most restrictive of these covenants limits the Company's ability to repurchase outstanding common stock (see Note 17).

        During fiscal 2001, certain of the holders of the Series A Preferred Stock elected to convert 2,591 shares with a stated value of $727,000 into shares of common stock at an initial conversion rate equal to ten shares of common stock for each share of Series A Preferred Stock. The Company was restricted under the terms of the Notes from paying cash dividends to the holders upon conversion. Accordingly, the Company issued $331,000 of subordinated notes with unpaid interest compounding annually at the prime rate until paid. The subordinated notes are convertible into common stock, in accordance with the terms of those notes, after August 1, 2003. During the first nine months of fiscal 2002, a total of 11,496 shares of the Company's Series A Preferred Stock (see Note 7) with a stated value of $3.2 million were converted into 114,955 shares of common stock. The Company was restricted under the terms of the Notes from paying cash dividends to the holders of the Series A Preferred Stock upon conversion. As a result, the Company issued subordinated notes totaling $2.2 million, on which unpaid interest will accumulate and compound annually at the prime rate until paid. The subordinated notes are convertible after August 1, 2003 into common stock in accordance with the terms of those notes.

7. COMMON AND PREFERRED STOCK

        In connection with the Motherhood acquisition on August 1, 1995, the Company issued 41,000 shares of Series A Cumulative Convertible Preferred Stock (the "Series A Preferred Stock") with a

F-16



stated value of $11.5 million. The Series A Preferred Stock has a preference in liquidation equal to the stated value plus accrued but unpaid dividends. The Company may redeem (but is under no obligation to do so) the Series A Preferred Stock at any time at a price equal to liquidation preference, subject to certain limitations imposed by the terms of the Credit Facility and the Notes agreement.

        The holders of the Series A Preferred Stock are entitled to receive annual cash dividends, which are cumulative to the extent not paid, and compound annually at 8.5% of the stated value. No dividends may be paid on common stock or any other shares of capital stock of the Company ranking junior to the Series A Preferred Stock (other than dividends payable in shares of common stock), until all cumulative and current dividends on the Series A Preferred Stock have been declared and paid in full. As of September 30, 2001 and 2000, accrued dividends on the Series A Preferred Stock were $7,055,000 and $6,037,000, respectively, and are classified as long-term liabilities in the accompanying Consolidated Balance Sheets.

        The Series A Preferred Stock is convertible into shares of common stock (i) between August 1, 2000 and May 1, 2006, at an initial conversion rate (subject to adjustments for stock splits, stock dividends, recapitalizations and similar events) equal to ten shares of common stock for each share of Series A Preferred Stock, or (ii) after November 1, 2006, at a conversion rate determined by dividing the aggregate stated value of all shares of Series A Preferred Stock to be converted by 90% of the then-market price of the common stock, as defined. After a holder's exercise of the conversion right under (i) above, the Company may only redeem the Series A Preferred Stock from the proceeds of an equity offering. The limitation on this redemption right may only be modified with the consent of the holders of a majority of the outstanding principal amount of the Notes. Upon any conversion, the holder of the Series A Preferred Stock to be converted is entitled to receive payment of all accrued and unpaid dividends in cash unless the Company is prohibited by limitations contained in the Notes agreement. In the case of a conversion under (i) above, if dividends are not paid in cash due to restrictions imposed by the Credit Facility or the Notes, the Company will issue a subordinated note. If the note is not paid by August 1, 2003, then all principal and accrued interest may be converted into that number of shares of common stock determined by dividing the amount due by the then-market price, as defined. In the case of a conversion under (ii) above, if accrued dividends are not paid in cash, then such dividends are convertible into common stock on the same basis as the shares of Series A Preferred Stock.

F-17


        In connection with the Rights Agreement dated March 17, 1997 (see Note 8), the Company authorized 10,000 shares of Series B Junior Participating Preferred Stock (the "Series B Preferred Stock"). The Series B Preferred Stock can be purchased in units equal to one one-thousandth of a share (the "Series B Units") under the terms of the Rights Agreement. The holders of the Series B Units are entitled to receive dividends when and if declared on common stock. Series B Units are junior to the common stock and Series A Preferred Stock for both dividends and liquidations. Each Series B Unit votes as one share of common stock.

8. RIGHTS AGREEMENT

        In accordance with the Company's Rights Agreement, the Company provided and will provide one Right outstanding for each share of Mothers Work common stock now or hereafter outstanding. Under certain limited conditions, as defined in the Rights Agreement, each Right entitles the registered holder to purchase from the Company one Series B Unit at $85 per unit, subject to adjustment. The rights expire on October 9, 2005 (the "Final Expiration Date").

        On March 17, 1997, the Company amended its Rights Agreement to provide the independent directors of the Company with some discretion in determining when the Distribution Date (as defined in the Rights Agreement) shall occur and the date until which the Rights may be redeemed. In addition, the Amended and Restated Rights Agreement exempts from its operation any person that acquires, obtains the right to acquire, or otherwise obtains beneficial ownership of 10.0% or more of the then outstanding shares of the Company's common stock (an "Acquiring Person") without any intention of changing or influencing control of the Company provided that such person, as promptly as practicable, divests himself or itself of a sufficient number of shares of common stock so that such person would no longer be an Acquiring Person.

        The Rights are not exercisable until the Distribution Date, which will occur upon the earlier of (i) ten business days following a public announcement that an Acquiring Person has acquired beneficial ownership of 10.0% or more of the Company's outstanding common stock, and ten business days following the commencement of a tender offer or exchange offer that would result in a person or group owning 10.0% or more of the Company's outstanding common stock, or (ii) such later date as may be determined by action of a majority of the independent directors.

        The Rights have certain anti-takeover effects. The Rights will cause substantial dilution to a person or group that attempts to acquire the Company without conditioning the offer on the redemption of the Rights. The Rights can be mandatorily redeemed by action of a majority of the independent directors at any time prior to the earlier of the Final Expiration Date and the Distribution Date for $.01 per Right.

        Upon exercise and the occurrence of certain events, as defined in the Rights Agreement, each holder of a Right, except the Acquiring Person, will have the right to receive Mothers Work common stock or common stock of the acquiring company having a value equal to two times the exercise price of the Right.

        On October 14, 2001, the Company amended its Rights Agreement to include Centre Partners and its affiliates as exempt persons under the terms of the Rights Agreement. In addition, the Company amended its Rights Agreement on June 4, 2002 to confirm the status of Meridian Venture Partners and its affiliates, collectively referred to as Meridian Venture Group, as an exempt person and to exclude,

F-18



under certain circumstances, any deemed attribution of beneficial ownership between Meridian Venture Group and Robert Brown, a general partner of Meridian Venture Group funds.

9. STOCK OPTION PLANS AND WARRANTS

        The Company has two stock option plans: the Director Stock Option Plan and the Amended and Restated 1987 Stock Option Plan. Under the Director Stock Option Plan, each outside director is granted 2,000 fully vested options on an annual basis at an exercise price equal to the fair market value on the grant date. Under the 1987 Stock Option Plan, as amended and restated, officers and certain employees may be granted options to purchase the Company's common stock at exercise prices equal to the fair market value of the stock at the date of grant or at other prices as determined by the Compensation Committee of the Board of Directors. No options have been granted by the Company at less than the fair market value of the Company's common stock on the date of grant for any of the periods presented. Up to a total of 1,425,000 options may be issued under the plans. Options outstanding generally vest ratably over 5 years and generally expire in ten years from the date of grant.

        Stock option activity for all plans was as follows:

 
  Outstanding
Options

  Weighted
Average
Exercise
Price

 
  (in thousands)

   
Balance — September 30, 1998   730   $ 10.85
Granted   185     9.98
Exercised   (35 )   5.54
Canceled   (71 )   10.09
   
 
Balance — September 30, 1999   809     10.93
Granted   179     10.61
Exercised   (24 )   9.37
Canceled   (62 )   10.02
   
 
Balance — September 30, 2000   902     10.98
Granted   285     9.41
Exercised   (2 )   8.15
Canceled   (169 )   9.51
   
 
Balance — September 30, 2001   1,016     10.58
   
 

        Options for 713,075, 544,512 and 485,889 shares were exercisable as of September 30, 2001, 2000 and 1999, respectively, and had a weighted-average exercise price of $10.96, $11.49 and $11.62 for those respective periods.

        The Company has adopted the disclosure requirements of SFAS No. 123, "Accounting for Stock-Based Compensation," but has elected to continue to measure compensation expense in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees." Accordingly, no compensation expense for stock options has been recognized for stock option awards granted at fair market value. Had the compensation cost for the Company's stock-based compensation plans been determined based on the fair value at the grant dates for awards under those plans in accordance with the provisions of

F-19



SFAS No. 123, the Company's net earnings and earnings per share would have been reduced to the pro forma amounts indicated below. The effect of applying SFAS No. 123 in this pro forma disclosure is not indicative of future amounts. SFAS No. 123 does not apply to options awarded prior to fiscal year ended September 30, 1996. Additional option awards are anticipated in future years.

 
  2001
  2000
  1999
 
  (in thousands, except per share amounts)

Net income available to common stockholders:                  
  As reported   $ 1,971   $ 3,659   $ 2,136
  Pro forma     521     2,689     735
Basic net income per common share:                  
  As reported   $ 0.57   $ 1.06   $ 0.60
  Pro forma     0.15     0.78     0.21
Diluted net income per common share:                  
  As reported   $ 0.55   $ 1.01   $ 0.57
  Pro forma     0.14     0.74     0.20

        The weighted average fair value of the stock options granted during 2001, 2000 and 1999 was $6.75, $8.98 and $9.28, respectively. The fair value of each option granted is estimated on the date of grant using the Black Scholes option pricing model with the following weighted-average assumptions:

 
  2001
  2000
  1999
Dividend yield   none   none   none
Expected price volatility   81.2%   83.7%   75.8%
Risk-free interest rates   3.79%   6.08%   6.05%
Expected lives   6.0 years   8.4 years   9.1 years

        The following table summarizes information about stock options outstanding at September 30, 2001:

 
  Options Outstanding
  Options Exercisable
Range of
Exercise
Prices

  Number
Outstanding
(in thousands)

  Weighted Average
Remaining Life

  Weighted Average
Exercise Price

  Number
Exercisable
(in thousands)

  Weighted Average
Exercise Price

$   4.55 to $  6.83   1   5.6   $ 6.63   1   $ 6.63
      6.84 to    9.10   206   7.4     8.61   97     8.60
      9.11 to  11.38   552   6.5     10.12   405     10.09
    11.39 to  13.65   230   4.8     13.13   183     13.29
    13.66 to  15.92   9   4.3     14.50   9     14.50
    15.93 to  18.20   5   3.9     16.50   5     16.50
    18.21 to  20.48   13   2.6     18.29   13     18.29
     
           
     
$   4.55 to $20.48   1,016   6.3   $ 10.58   713   $ 10.96
     
           
     

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        During the first nine months of fiscal 2002, a total of 260,700 options were granted to certain employees and non-employee directors for the purchase of the Company's common stock at prices not less than the fair market value of the Company's common stock on the date of the grant.

        In connection with the Company's acquisition of A Pea in the Pod on April 5, 1995 ("the Pea Acquisition"), the Company entered into a $15.0 million subordinated debt agreement and issued warrants to the lender to purchase up to 140,123 shares of common stock at $.01 along with the subordinated debt. The warrants were valued at their estimated fair market value of $1.0 million and were recorded as an original debt discount on the subordinated debt incurred. The determination of the fair value of the warrants was estimated at the date of issuance based on the then fair market value of the Company's common stock discounted at 12% with an estimated life of seven years. The warrants were immediately vested upon grant and expire in April 2002. These warrants were exercised on March 12, 2002. A portion of the proceeds from the sale of the Notes was used to repay this subordinated debt.

10. INCOME TAXES

        For the years ended September 30, income tax provisions were comprised of the following (in thousands):

 
  2001
  2000
  1999
Current provision   $ 2,920   $ 113   $ 2,467
Deferred provision     536     4,136     957
   
 
 
    $ 3,456   $ 4,249   $ 3,424
   
 
 

        The reconciliations of the statutory federal rate to the Company's effective income tax rates for the years ended September 30, were as follows:

 
  2001
  2000
  1999
 
Statutory tax rate   34.0 % 34.0 % 34.0 %
State taxes, net of federal benefit   3.4   3.1   4.9  
Amortization of goodwill   10.8   8.1   11.0  
Other   1.8   0.5   0.4  
   
 
 
 
    50.0 % 45.7 % 50.3 %
   
 
 
 

F-21


        The deferred tax effects of temporary differences giving rise to the Company's net deferred tax assets at September 30 were as follows (in thousands):

 
  2001
  2000
 
Deferred tax assets:              
Net operating losses carryforwards   $   $ 1,995  
Depreciation     9,207     7,263  
Deferred rent     1,651     1,771  
Inventory reserves     513     514  
Employee benefit accruals     1,016     427  
Alternative minimum tax credit carryforwards         394  
Other accruals     597     719  
Other     190     681  
   
 
 
      13,174     13,764  
Deferred tax liabilities:              
Prepaid expenses     (38 )   (92 )
   
 
 
    $ 13,136   $ 13,672  
   
 
 

        The Company had net operating loss carryforwards for tax purposes at September 30, 2000 of approximately $5,869,000, of which $4,309,000 was acquired in the acquisitions of A Pea in the Pod and Motherhood. The Company also had alternative minimum tax credits of approximately $394,000 that could be utilized against regular income taxes in the future. The remaining net operating loss carryforwards and alternative minimum tax credits as of September 30, 2000 were fully utilized during fiscal 2001.

        No valuation allowance has been provided for the net deferred tax assets. Based on the Company's historical levels of taxable income, as adjusted for the restructuring and the nondeductibility of goodwill amortization and the Episode operations (see Note 13), management believes it is more likely than not that the Company will realize the net deferred tax assets at September 30, 2001. Furthermore, management believes the existing net deductible temporary differences will reverse during periods in which the Company generates taxable income. There can be no assurance, however, that the Company will generate taxable earnings or any specific level of earnings in the future.

11. COMMITMENTS AND CONTINGENCIES

        The Company leases its retail facilities and certain equipment under various noncancelable operating leases. Certain of these leases have renewal options. Total rent expense under operating leases amounted to $49,572,000, $44,210,000 and $38,001,000 in fiscal 2001, 2000 and 1999, respectively. Such amounts include contingent rentals based upon a percentage of sales totaling $1,116,000, $717,000 and $1,261,000 in fiscal 2001, 2000 and 1999, respectively.

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11. COMMITMENTS AND CONTINGENCIES (Continued)

        Future annual minimum operating lease payments, including payments for equipment leases, as of September 30, 2001 are as follows (in thousands):

2002   $ 36,014
2003     33,195
2004     27,652
2005     22,318
2006     18,415
2007 and thereafter     48,846
   
    $ 186,440
   

        From time to time, the Company is named as a defendant in legal actions arising from its normal business activities. Although the amount of any liability that could arise with respect to currently pending actions cannot be accurately predicted, in the opinion of management of the Company, any such liability will not have a material adverse effect on the financial position or operating results of the Company.

12. SUBSEQUENT EVENTS

iMaternity Acquisition

        On October 17, 2001 (the "Acquisition Date"), the Company acquired eSpecialty Brands, LLC ("iMaternity") for $19,863,000, including transaction costs. The purchase price consisted of 302,619 shares of Series C Cumulative Redeemable Preferred Stock (the "Series C Preferred Stock") valued at an estimated $59.48 per share, or $17,999,000, as determined by an independent third party appraiser, detachable warrants to purchase 350,000 shares of the Company's common stock with an estimated fair value of $874,000, as determined by an independent third party appraiser using the Black-Scholes pricing model with a 30% discount applied due to the lack of marketability, and transaction costs of $990,000. The following assumptions were used in the pricing model: dividend yield of zero, risk free interest rate of 4.45%, volatility factor of the expected market price of the Company's common stock of 60.0% and expected life equal to the contractual term of the warrants of 7 years. The excess by which the stated value of the Series C Preferred Stock exceeds its carrying value is being accreted to the earliest redemption date using the effective interest method. This accretion will be recorded as dividends.

        The holders of the Series C Preferred Stock are entitled to receive dividends, which are cumulative to the extent not paid, and compound quarterly at 8.625% of the stated value. Dividends accrue for the first year and are thereafter paid out in part in cash with the balance accruing, subject to certain limitations imposed by the Credit Facility and the holders of the Notes. No dividends may be paid on common stock, or on any other shares of capital stock of the Company ranking junior to the Series C Preferred Stock, other than dividends payable in shares of common stock, until all cumulative and current dividends on the Series C Preferred Stock have been declared and paid in full. The Series C Preferred Stock is junior to the Series A Preferred Stock in liquidation and pari passu to the Series A Preferred Stock in dividends.

F-23



        Upon a liquidation, dissolution or winding up of the Company, as defined, after any payments to the holders of the outstanding shares of the Company's Series A Preferred Stock, and before any payments to the holders of junior stock, the holders of the Series C Preferred Stock have the right to receive in such liquidation, distribution or winding up an amount equal to the stated value plus the greater of accrued and unpaid dividends or the participation amount, which is defined as an amount equal to 10% of the increase in market value per share of the Company's common stock for the period from the closing of the iMaternity acquisition until the liquidation, dissolution or winding up of the Company, as defined.

        On the earlier of October 18, 2006, or upon a change of control or other fundamental transaction, as defined, the holders of the Series C Preferred Stock have the right to require the Company to purchase their shares for cash at a price equal to the stated value plus accrued and unpaid dividends (the "put right"). If the Company defaults on its obligation under the put right, the holders of the outstanding Series C Preferred Stock have the right to convert their Series C Preferred Stock into shares of the Company's common stock, provided that, in no event shall the aggregate number of shares issued upon such conversion, plus 350,000 shares of common stock related to the warrants issued in connection with the iMaternity acquisition, exceed an amount equal to 19.9% of the number of outstanding shares of the Company's common stock outstanding immediately preceding the iMaternity acquisition. At any time on or after April 18, 2004, the Company has the right to purchase the outstanding Series C Preferred Shares for cash at a price equal to the stated value plus the greater of accrued and unpaid dividends or the participation amount, as defined.

        Under the terms of the merger agreement, at any time after the closing of the iMaternity acquisition, the Company has the right to make an offer to purchase for cash all outstanding shares of Series C Preferred Shares at a price equal to the stated value plus accrued and unpaid dividends. If a majority of the holders of the outstanding Series C Preferred Stock, as defined, fail to accept such offer, then such holders forfeit their warrants, or if any warrant has been exercised and the underlying common stock has been sold by any holder, then such holder forfeits accrued and unpaid dividends on such holder's Series C Preferred Stock. Further, upon such failure to accept such offer to purchase, all holders of the outstanding Series C Preferred Stock forfeit certain protective provisions under the Agreement and Plan of Merger, including prohibitions on issuing senior stock or parity stock, as defined, and redeeming junior securities.

        The acquisition has been accounted for under the purchase method of accounting. Assets acquired and liabilities assumed have been recorded at their estimated fair values in fiscal 2002. The fiscal 2002 recorded values of assets acquired and liabilities assumed are preliminary and subject to change.

        Based on the preliminary allocation of purchase price, the application of the purchase method resulted in approximately $25,785,000 of excess purchase price over the estimated fair value of the net tangible assets acquired of $21,150,000, less assumed liabilities of $17,995,000 and costs to exit certain operations and locations of iMaternity of $9,077,000. The Company recognizes that certain identifiable intangible assets were acquired, primarily trademarks, trade names, and Internet domain names. However, as determined by an independent third party appraiser, based on the nature of the items and use within the Company's business and industry, no value was assigned to any of the identifiable intangibles. Accordingly, the excess purchase price has been assigned to goodwill.

        In connection with the purchase price allocation, the fair value of the acquired finished goods inventory was based on an estimate of the net realizable value of the inventory less estimated costs to

F-24



dispose. A significant portion of the acquired inventory is expected to be sold at substantial discounts in connection with store closures or required changes in assortment mix at the acquired stores to align with the Company's merchandising strategies.

        Additionally, as part of the purchase price allocation, the Company recorded $1.7 million of liabilities relating to claims by iMaternity vendors for amounts owed by iMaternity that had not been disclosed to the Company by the sellers prior to the closing. The Company is currently investigating these claims. If the Company has liability for these undisclosed amounts, it has the right to seek indemnification from the seller. If the Company were to prevail in an indemnification claim, it could reduce the number of outstanding shares of the Series C Preferred Stock issued to the sellers, or, if the sellers no longer hold shares of our Series C Preferred Stock, receive cash damages. In that event, the goodwill recorded in connection with the transaction would be correspondingly reduced. The Company believes the $1.7 million represents a reasonable estimate of its potential liability for these vendor claims.

        The Company developed a plan in conjunction with the acquisition to close approximately 92 iMaternity stores and reopen the remaining acquired locations under the Company's existing store concepts of Motherhood and Mimi Maternity. Further, the plan included the shutdown of iMaternity's corporate headquarters and warehouse operation in Chicago, as well as its manufacturing and warehousing facilities in Costa Rica. In connection with the plan, the Company recorded severance costs for involuntarily terminated employees of the acquired business of $2,922,000, lease termination fees and related legal costs of $4,200,000 and accrued for other costs to be incurred to complete the exit activities of the acquired business totaling $1,955,000. Approximately 850 employees of the acquired business were expected to be terminated as part of the plan, consisting of 528 corporate and 322 store employees. The Company anticipates that it will substantially complete the entire integration plan within one year of the Acquisition Date.

        The following table sets forth the net non-cash assets that were acquired as a result of the iMaternity acquisition (in thousands):

Non-cash assets (liabilities):        
  Inventory   $ 6,168  
  Property, plant equipment     3,612  
  Deferred income taxes     10,043  
  Other current assets     753  
  Goodwill     25,785  
  Current liabilities     (19,170 )
  Debt     (8,892 )
   
 
  Net non-cash assets acquired     18,299  
Less: Preferred Stock issued     (17,999 )
          Warrant issued     (874 )
   
 
Cash acquired from the acquisition of iMaternity   $ (574 )

F-25


Securities Offerings

        On June 10, 2002, the Company filed two registration statements with the Securities and Exchange Commission (the "SEC"), one of which relates to the offering of 1,100,000 shares, which includes 100,000 shares being sold by selling stockholders, and one of which relates to the offering of $125 million of senior notes due 2010. The equity offering is not contingent on the debt offering, but the debt offering is contingent on the equity offering. The Company plans to use the net proceeds from these offerings to repay the existing Notes, to repay subordinated notes issued to the holders of Series A Preferred Stock in lieu of accrued and unpaid dividends, to pay all accrued and unpaid dividends on Series A Preferred Stock and Series C Preferred Stock, to redeem all outstanding shares of Series A Preferred Stock and to purchase all outstanding shares of Series C Preferred Stock, to repay outstanding borrowings under the Credit Facility and for general corporate purposes. There can be no assurance that either of these offerings will be completed or that they will generate net proceeds sufficient for these planned uses.

13. RESTRUCTURING CHARGES

        During fiscal 1998, the Company announced that all of its Episode stores, which featured non-maternity women's apparel, would be closed or converted into maternity clothing stores. In connection with the closure and conversion of the 51 Episode stores in operation at the time the restructuring plan was entered into, the Company recorded charges totaling $20.9 million ($13.8 million net of tax benefit of $7.1 million) which were reflected in the Consolidated Statements of Operations as cost of goods sold ($10.3 million) and restructuring charges ($10.6 million). The charges recorded to cost of goods sold related to inventory purchase commitments and inventory write-downs based on estimated liquidation values. Approximately 159 employees were expected to be terminated as part of the restructuring plan, which consisted of 15 corporate employees and 144 store employees. The restructuring charges were comprised of $2.9 million of legal fees and expenses, lease buy-out features and other known costs associated with the transfer of leases, $7.3 million for losses on fixed assets and leasehold improvements to be disposed of or sold (including leasehold improvement commitments), $0.2 million for severance, and the remainder for other miscellaneous costs associated with the closures and conversions such as additional legal fees and royalty payments. There were no fixed assets or leasehold improvements of the Episode division held and used by the Company subsequent to the Episode closure. All amounts recorded as restructuring charges associated with the write-downs of fixed assets and leasehold improvements were estimated based on the remaining net book value of the assets to be disposed of or sold, and the estimated sale proceeds. Depreciation and amortization associated with the fixed assets and leasehold improvements to be disposed of or sold were included in selling, general and administrative expenses up until the time the assets were available for sale (which approximates the timing of the actual disposal or sale of the assets) upon which the remaining net book value, net of any sale proceeds, was recorded against the restructuring charges. Prior to September 30, 1998, the Company closed and converted 21 store locations and terminated 69 employees, to whom the $0.2 million in accrued severance was paid out and charged against the liability. During the first quarter of fiscal 1999, the Company sold 24 (of the remaining 30 stores as of September 30, 1998) to Wet Seal, Inc. and terminated 72 employees, to whom no severance was paid. The remaining 6 stores were closed within the six-month period ended March 31, 1999. The Company hired a liquidating service to manage the remaining 6 store locations and to liquidate the remaining inventory during this period. The remaining 18 employees, as planned, were terminated during the three-month period ended

F-26



March 31, 1999. No severance was paid out related to the final tranche of employees terminated under the restructuring plan.

        At September 30, 1998, approximately $4.6 million of the restructuring costs (including charges recorded to cost of goods sold) remained in accrued expenses. Of the $4.6 million, $2.1 million related to losses on purchase commitments for inventory and leasehold improvements, $2.2 million related to legal fees and expenses, lease buy-out features, and other fees associated with the transfer of leases, and the remainder was for other miscellaneous charges. During fiscal 1999, the Company recorded charges of $3.6 million against the reserve which included $2.0 million of charges to settle inventory and leasehold improvement purchase commitments and $1.6 million of costs incurred to settle lease transfers. At September 30, 1999, approximately $1.0 million of the restructuring costs remained in accrued expenses. During fiscal 2000, the Company finalized its remaining lease transfer and incurred costs for miscellaneous related matters associated with this divestiture and to settle inventory purchase commitments. At September 30, 2000, approximately $0.3 million of the restructuring costs remained in accrued expenses. It is expected that the full amount will be used for legal fees and other fees related to the final lease transfer. During fiscal 2001 the Company charged an additional $0.1 million against the reserve for legal fees related to the lease transfer and settlement of a vendor dispute, leaving a balance of $0.1 million for any outstanding fees.

14. SUBSIDIARY GUARANTOR

        Pursuant to the terms of the indenture relating to the Notes, Cave Springs, Inc. (100% owned subsidiary of Mothers Work, the "Subsidiary Guarantor") has jointly and severally provided an unconditional guarantee of the obligations of Mothers Work with respect to the Notes. The Subsidiary Guarantor charges royalties to Mothers Work for the retail use of its intellectual property and charges interest on the balance of any unpaid royalties and/or funds advanced to Mothers Work. Substantially all of the assets of the Subsidiary Guarantor consist of the intercompany receivable from Mothers Work for unpaid royalties, cash advances and interest. All intercompany amounts are eliminated in consolidation. There are no restrictions on any of the assets of the Subsidiary Guarantor which would limit its ability to transfer funds to Mothers Work in the form of loans, advances or cash dividends, except as provided by applicable law.

15. EMPLOYMENT AND CONSULTING AGREEMENTS

        The Company has employment agreements with its Chairman of the Board/Chief Executive Officer ("CEO") and its President/Chief Operating Officer ("COO"). These agreements provide for base compensation (approximately $400,000 each for fiscal 2001 and $377,000 each for fiscal 2000), increasing annually thereafter in an amount to be determined by the Compensation Committee of the Board of Directors and salary continuation and severance payments should employment of the officers be terminated under specified conditions, as defined. The agreements, which expire on September 30, 2003, automatically extend for successive one-year periods extending the expiration date into the third year after the extension, unless either the Company or the executive gives written notice to the other party that the term will not extend. Additionally, the CEO and COO are entitled to an annual cash bonus and stock options based on performance, as defined.

F-27



16. EMPLOYEE BENEFIT PLANS

        The Company has a 401(k) savings plan for full-time employees who have at least one year of service and are 21 years of age. Employees can contribute up to 20% of their annual salary. Effective January 1, 1999, employees who meet certain criteria are eligible for a matching contribution from the Company based on a sliding scale. Company matches are made on the first day of the succeeding calendar year. Company matches vest fully on the employee's fourth anniversary date. Company matching contributions totaling $53,000 and $47,000 were made in fiscal 2001 and 2000, respectively. There were no Company contributions in fiscal 1999. In addition the Company may make discretionary contributions to the plan, which vest over a five-year period. The Company has not made any discretionary contributions.

17. STOCK BUYBACK

        During fiscal 1999, the Board of Directors authorized the Company to purchase up to 265,000 shares of its own stock in private transactions or on the open market. As of September 30, 2000, the Company had purchased and retired 205,185 shares in the aggregate at a total cost of $2,206,000. Since then, the Company has been restricted from further stock repurchases under the terms of the indenture to the Notes.

18. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

        Quarterly financial results for the years ended September 30, 2001 and 2000 are as follows (in thousands, except per share amounts):

 
  Quarter
 
  9/30/01
  6/30/01
  3/31/01
  12/31/00
Fiscal 2001                        

Net sales

 

$

92,637

 

$

103,970

 

$

89,029

 

$

102,670
Gross profit     46,790     54,227     43,117     49,852
Net income (loss) available to common stockholders   $ (185 ) $ 3,423   $ (2,262 ) $ 995
   
 
 
 
Basic net income (loss) per share   $ (0.05 ) $ 0.99   $ (0.65 ) $ 0.29
   
 
 
 
Diluted net income (loss) per share   $ (0.05 ) $ 0.95   $ (0.65 ) $ 0.28
   
 
 
 
 
  Quarter
 
  9/30/00
  6/30/00
  3/31/00
  12/31/99
Fiscal 2000                        

Net sales

 

$

92,239

 

$

98,495

 

$

83,683

 

$

91,866
Gross profit     46,617     49,434     41,373     45,559
Net income (loss) available to common stockholders   $ (205 ) $ 2,620   $ (836 ) $ 2,080
   
 
 
 
Basic net income (loss) per share   $ (0.06 ) $ 0.76   $ (0.24 ) $ 0.61
   
 
 
 
Diluted net income (loss) per share   $ (0.06 ) $ 0.72   $ (0.24 ) $ 0.57
   
 
 
 

F-28


        The Company's business, like that of certain other retailers, is seasonal. A significant portion of the Company's net sales and profits are realized during the first and third fiscal quarters, corresponding to the holiday selling season and Spring sales period, respectively.

19. RELATED PARTY TRANSACTIONS

        Other than the husband and wife relationship between the CEO and COO, there are no other family relationships among any other executive officers of the Company.

        The Company paid a Director on the Board of Directors of the Company $148,000, $120,000 and $148,000 in fiscal 2001, 2000 and 1999, respectively, for merchandise consulting fees. In addition, another Director was re-elected effective January 1, 2001 to the partnership at Pepper Hamilton LLP, which provides legal services to the Company. The Company incurred legal fees to this law firm of $672,000, $449,000 and $275,000 in fiscal 2001, 2000 and 1999, respectively. As of September 30, 2001, the Company had amounts outstanding to this law firm of approximately $645,000, which are included in accounts payable and accrued expenses in the accompanying Consolidated Balance Sheets.

F-29



MOTHERS WORK, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share amounts)

 
  March 31,
2002

  September 30,
2001

 
 
  (unaudited)

   
 
ASSETS              
Current Assets:              
  Cash and cash equivalents   $ 2,761   $ 10,358  
  Trade receivables     5,643     4,726  
  Inventories     68,093     73,090  
  Deferred income taxes     7,954     2,278  
  Prepaid expenses and other current assets     3,582     4,404  
   
 
 
    Total current assets     88,033     94,856  
Property, Plant and Equipment, net     46,572     46,025  
Assets Held for Sale     1,575      
Other Assets:              
  Goodwill     55,671     29,886  
  Deferred financing costs, net of accumulated amortization of $3,038 and $2,788     1,390     1,640  
  Other intangible assets, net of accumulated amortization of $2,110 and $1,952     1,216     1,295  
  Deferred income taxes     13,488     10,858  
  Other non-current assets     613     617  
   
 
 
    Total other assets     72,378     44,296  
   
 
 
    $ 208,558   $ 185,177  
   
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY              
Current Liabilities:              
  Line of credit   $ 20,367   $ 32,229  
  Current portion of long-term debt     434     434  
  Accounts payable     18,363     13,244  
  Accrued expenses and other current liabilities     24,101     16,440  
   
 
 
    Total current liabilities     63,265     62,347  
Long-Term Debt     98,182     96,179  
Accrued Dividends on Series A Preferred Stock     5,652     7,055  
Deferred Rent     4,999     4,855  
Series C Cumulative Redeemable Preferred Stock     18,880      
Commitments and Contingencies (Note 3)              
Stockholders' Equity:              
Preferred stock, 2,000,000 shares authorized              
    Series A cumulative convertible preferred stock, $.01 par value, $280.4878 stated value, 41,000 shares authorized and issued, 27,877 and 38,409 shares outstanding, respectively (liquidation value of $13,471 and $17,828, respectively)     7,819     10,773  
    Series B junior participating preferred stock, $.01 par value, 10,000 shares authorized, none outstanding          
  Common stock, $.01 par value, 10,000,000 shares authorized, 3,740,547 and 3,480,122 shares issued and outstanding, respectively     37     35  
  Additional paid-in capital     30,917     26,949  
  Accumulated deficit     (21,193 )   (23,016 )
   
 
 
    Total stockholders' equity     17,580     14,741  
   
 
 
    $ 208,558   $ 185,177  
   
 
 

The accompanying notes are an integral part of these consolidated financial statements.

F-30



MOTHERS WORK, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)

 
  Three Months Ended
March 31,

  Six Months Ended
March 31,

 
 
  2002
  2001
  2002
  2001
 
Net sales   $ 104,865   $ 89,029   $ 219,250   $ 191,699  
Cost of goods sold     49,653     45,912     105,635     98,730  
   
 
 
 
 
  Gross profit     55,212     43,117     113,615     92,969  
Selling, general and administrative expenses     50,315     42,833     101,251     86,245  
   
 
 
 
 
  Operating income     4,897     284     12,364     6,724  
Interest expense     3,433     3,831     7,020     7,714  
   
 
 
 
 
  Income (loss) before income taxes     1,464     (3,547 )   5,344     (990 )
Income tax provision (benefit)     642     (1,658 )   1,988     (469 )
   
 
 
 
 
Net income (loss)     822     (1,889 )   3,356     (521 )
Dividends on preferred stock     733     373     1,533     746  
   
 
 
 
 
Net income (loss) available to common stockholders   $ 89   $ (2,262 ) $ 1,823   $ (1,267 )
   
 
 
 
 
Income (loss) per share — Basic   $ 0.02   $ (0.65 ) $ 0.52   $ (0.37 )
   
 
 
 
 
Average shares outstanding — Basic     3,569     3,454     3,540     3,453  
   
 
 
 
 
Income (loss) per share — Diluted   $ 0.02   $ (0.65 ) $ 0.49   $ (0.37 )
   
 
 
 
 
Average shares outstanding — Diluted     3,718     3,454     3,764     3,453  
   
 
 
 
 

The accompanying notes are an integral part of these consolidated financial statements.

F-31



MOTHERS WORK, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 
  Six Months Ended
March 31,

 
 
  2002
  2001
 
Cash flows from operating activities              
Net income (loss)   $ 3,356   $ (521 )
Adjustments to reconcile net income (loss) to net cash provided by operating activities:              
  Depreciation and amortization     4,884     5,923  
  Deferred income taxes     1,737     (469 )
  Amortization of deferred financing costs     250     249  
  Accretion of discount on Notes     106     94  
  Provision for deferred rent     144     202  
Changes in assets and liabilities, net of effect of acquisition:              
  (Increase) decrease in —              
    Trade receivables     (522 )   367  
    Inventories     11,165     6,054  
    Prepaid expenses and other current assets     1,184     401  
  (Decrease) in —              
    Accounts payable, accrued expenses and other current liabilities     (9,963 )   (3,346 )
   
 
 
      Net cash provided by operating activities     12,341     8,954  
   
 
 
Cash flows from investing activities              
Acquisition of iMaternity, net of cash acquired     574      
Purchase of property and equipment     (3,236 )   (5,717 )
Increase in intangibles     (79 )   (103 )
   
 
 
      Net cash used in investing activities     (2,741 )   (5,820 )
   
 
 
Cash flows from financing activities              
Reduction of borrowings under line of credit and cash overdrafts, net     (8,289 )   (3,516 )
Repayments of long-term debt     (158 )   (283 )
Repayments of debt assumed in acquisition of iMaternity     (8,892 )    
Proceeds from exercise of stock options     142     17  
   
 
 
      Net cash used in financing activities     (17,197 )   (3,782 )
   
 
 
Net decrease in cash and cash equivalents     (7,597 )   (648 )
Cash and cash equivalents, beginning of period     10,358     3,076  
   
 
 
Cash and cash equivalents, end of period   $ 2,761   $ 2,428  
   
 
 
Supplemental disclosures of cash flow information:              
    Cash paid for interest   $ 6,708   $ 7,435  
   
 
 
    Cash paid for income taxes   $ 2,466   $ 294  
   
 
 

The accompanying notes are an integral part of these consolidated financial statements.

F-32



MOTHERS WORK, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2002

(unaudited)

1.    BASIS OF FINANCIAL STATEMENT PRESENTATION

        The accompanying unaudited consolidated financial statements are prepared in accordance with the requirements of Article 10 of Regulation S-X and, accordingly, certain information and footnote disclosures have been condensed or omitted. Reference should be made to the Form 10-K, as amended, as of and for the year ended September 30, 2001 for Mothers Work, Inc. and Subsidiary (the "Company") as filed with the Securities and Exchange Commission for additional disclosures including a summary of the Company's accounting policies.

        In the opinion of management, the consolidated financial statements contain all adjustments, consisting of normal recurring adjustments, necessary to present fairly the consolidated financial position 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 operating results for the full year.

2.    STOCK OPTIONS AND WARRANTS

        During the quarter and six months ended March 31, 2002, a total of 86,000 and 206,350 options, respectively, were granted to certain employees and non-employee directors for the purchase of the Company's common stock at prices not less than the fair market value of the Company's common stock on the date of grant.

        In connection with the acquisition of iMaternity on October 17, 2001 (see Note 8), the Company issued warrants to the sellers for the purchase of 350,000 shares of the Company's common stock at an exercise price of $22.50 per share, with an estimated fair value of approximately $874,000. The Company obtained an independent appraisal to determine the fair value of the warrants, estimated at the date of issuance using the Black-Scholes pricing model with a 30% discount applied due to lack of marketability. The following assumptions were used in the pricing model: dividend yield of zero, risk free interest rate of 4.45%, volatility factor of the expected market price of the Company's common stock of 60.0%, and an expected life equal to the contractual term of the warrants of 7 years. The fair value of the warrants was recorded to additional paid-in capital at the date of grant. The warrants were immediately vested upon grant and are exercisable for 7 years. None of these warrants were exercised as of March 31, 2002.

        In conjunction with debt issued in the acquisition of A Pea in the Pod in 1995, the Company issued 140,123 warrants for the purchase of the Company's common stock at $.01 per share. These warrants were exercised on March 12, 2002.

3.    COMMITMENTS AND CONTINGENCIES

        From time to time, the Company is named as a defendant in legal actions arising from its normal business activities. Although the amount of any liability that could arise with respect to currently pending actions cannot be accurately predicted, in the opinion of management of the Company, any such liability will not have a material adverse effect on the financial position or operating results of the Company.

F-33



4.    EARNINGS PER SHARE (EPS)

        Basic EPS is computed by dividing net income available to common stockholders by the weighted average number of outstanding common shares. Diluted EPS is computed based upon the weighted average number of outstanding common shares, after giving effect to the potential dilutive effect from the assumed exercise of stock options and warrants as well as the assumed conversion of dilutive preferred stock and subordinated notes.

        The following summarizes the diluted EPS calculation (in thousands, except per share amounts):

 
  For the Quarter Ended
March 31, 2002

  For the Quarter Ended
March 31, 2001

 
 
  Income
  Shares
  Earnings Per Share
  Loss
  Shares
  Loss Per Share
 
Basic EPS   $ 89   3,569   $ 0.02   $ (2,262 ) 3,454   $ (0.65 )
Incremental shares from the assumed exercise of outstanding stock options and warrants       149                    
   
 
       
 
       
Diluted EPS   $ 89   3,718   $ 0.02   $ (2,262 ) 3,454   $ (0.65 )
   
 
 
 
 
 
 
 
  For the Six Months Ended
March 31, 2002

  For the Six Months Ended
March 31, 2001

 
 
  Income
  Shares
  Earnings Per Share
  Loss
  Shares
  Loss Per Share
 
Basic EPS   $ 1,823   3,540   $ 0.52   $ (1,267 ) 3,453   $ (0.37 )
Incremental shares from the assumed exercise of outstanding stock options and warrants       154                    
Assumed conversion of subordinated notes     19   70                    
   
 
       
 
       
Diluted EPS   $ 1,842   3,764   $ 0.49   $ (1,267 ) 3,453   $ (0.37 )
   
 
 
 
 
 
 

        Options to purchase 127,740 and 840,635 shares were outstanding as of March 31, 2002 and 2001, respectively, but were not included in the computation of diluted EPS as their effect would have been antidilutive.

        During the second quarter of fiscal 2002, certain holders of the Series A Cumulative Convertible Preferred Stock (the "Series A Preferred Stock") elected to convert 7,316 of such shares, with a stated value of $2.1 million and at a conversion rate equal to ten shares of common stock for each share of Series A Preferred Stock (a total of 73,160 shares of common stock). For the first six months of fiscal 2002, a total of 10,532 shares with a stated value of $3.0 million were converted into 105,312 shares of common stock. The 27,877 and 41,000 shares of Series A Preferred Stock outstanding at March 31, 2002 and 2001, respectively, convertible into 278,772 and 410,000 shares of common stock, respectively, were determined to be antidilutive and therefore excluded from the EPS computation for the periods presented.

        The Company was restricted under the terms of the $92 million of 125/8% Senior Unsecured Exchange Notes Due 2005 (the "Notes"), from paying cash dividends to the holders of the Series A Preferred Stock upon conversion. As a result, the Company issued subordinated notes totaling $1.5 million and $2.1 million for the second quarter and first six months of fiscal 2002, respectively, on

F-34



which unpaid interest will accumulate and compound annually at the prime rate until paid. The subordinated notes are convertible after August 1, 2003 into common stock in accordance with the terms of those notes. For the quarter ended March 31, 2002, the $2,386,000 of subordinated notes outstanding as of March 31, 2002 were determined to be antidilutive and, therefore, excluded from the EPS computation.

        Additionally, in connection with the acquisition of iMaternity on October 17, 2001 (see Note 8), the Company issued 302,619 shares of Series C Cumulative Redeemable Preferred Stock (the "Series C Preferred Stock") with detachable warrants. The Series C Preferred Stock is convertible into common stock only if the Company were to default on its obligation under the provisions of the put right which gives the holders of the Series C Preferred Stock the right, under certain circumstances, to require the Company to purchase their shares of Series C Preferred Stock for cash. All of the shares of Series C Preferred Stock and warrants were outstanding as of March 31, 2002 and were excluded from the EPS computations, as their effect would have been antidilutive.

        The Company's outstanding antidilutive options, warrants and shares of Series A and Series C Preferred Stock could potentially dilute EPS in the future.

5.    INVENTORIES

        Inventories were comprised of the following (in thousands):

 
  March 31, 2002
  September 30, 2001
Finished goods   $ 59,116   $ 61,535
Work-in-progress     3,058     3,486
Raw materials     5,919     8,069
   
 
    $ 68,093   $ 73,090
   
 

6.    ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

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

 
  March 31, 2002
  September 30, 2001
Salaries, wages, and employee benefits   $ 6,664   $ 5,274
Restructuring costs (Notes 8 and 9)     5,298     128
Interest     2,135     2,179
Sales tax     2,027     1,763
Rent     1,987     676
Insurance     1,404     961
Professional fees     862     648
Income taxes payable     184     2,308
Other     3,540     2,503
   
 
    $ 24,101   $ 16,440
   
 

        Interest payments are made semiannually in February and August to the holders of the Notes.

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7.    ACCOUNTING FOR GOODWILL

        In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS No. 141 also specifies the criteria applicable to intangible assets acquired in a purchase method business combination to be recognized and reported apart from goodwill. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually. SFAS No. 142 further requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values and be reviewed for impairment.

        The Company adopted SFAS No. 141 and 142 effective October 1, 2001. In adopting SFAS No. 142, the Company no longer amortizes goodwill. The following table reflects the adjustment to exclude goodwill amortization expense recognized in the prior periods as presented (in thousands, except per share amounts):

 
  For the Quarter Ended March 31,
 
 
  2002
  2001
 
Reported net income (loss)   $ 822   $ (1,889 )
  Add back goodwill amortization         550  
   
 
 
  Adjusted net income (loss)     822     (1,339 )
  Dividends on preferred stock     733     373  
   
 
 
  Adjusted net income (loss) available to common stockholders   $ 89   $ (1,712 )
   
 
 
Income (loss) per share — basic:              
  Reported net income (loss)   $ 0.02   $ (0.65 )
  Goodwill amortization         0.16  
   
 
 
  Adjusted net income (loss)   $ 0.02   $ (0.49 )
   
 
 
Income (loss) per share — diluted:              
  Reported net income (loss)   $ 0.02   $ (0.65 )
  Goodwill amortization         0.16  
   
 
 
  Adjusted net income (loss)   $ 0.02   $ (0.49 )
   
 
 
             
 
  For the Six Months Ended March 31,
 
 
  2002
  2001
 
Reported net (loss) income   $ 3,356   $ (521 )
  Add back goodwill amortization         1,060  
   
 
 
  Adjusted net income     3,356     539  
  Dividends on preferred stock     1,533     746  
   
 
 
  Adjusted net income (loss) available to common stockholders   $ 1,823   $ (207 )
   
 
 

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Income (loss) per share — basic:              
  Reported net income (loss)   $ 0.52   $ (0.37 )
  Goodwill amortization         0.31  
   
 
 
  Adjusted net income (loss)   $ 0.52   $ (0.06 )
   
 
 
Income (loss) per share — diluted:              
  Reported net income (loss)   $ 0.49   $ (0.37 )
  Goodwill amortization         0.31  
   
 
 
  Adjusted net income (loss)   $ 0.49   $ (0.06 )
   
 
 

        As of October 1, 2001, management determined that the Company had one reporting unit for purposes of applying SFAS No. 142 based on its reporting structure. The Company has made its initial assessment of impairment for the transition period as of October 1, 2001. The fair value of the Company's single reporting unit was determined based on the then fair market value of the Company's outstanding common stock on a control basis. Based on this initial assessment, no impairment loss was recognized. The Company plans to perform an annual assessment for goodwill impairment at the end of each fiscal year or as impairment indicators arise.

        A summary of changes in the carrying amount of goodwill for the first six months of fiscal 2002 is as follows (in thousands):

Goodwill, net, at September 30, 2001   $ 29,886
Add: goodwill recorded in the acquisition of iMaternity (see Note 8)     25,785
   
Goodwill, net, at March 31, 2002   $ 55,671
   

8.    ACQUISITION

        On October 17, 2001 (the "Acquisition Date"), the Company acquired eSpecialty Brands, LLC ("iMaternity") for $19,863,000, including transaction costs. The purchase price consisted of 302,619 shares of Series C Preferred Stock valued at an estimated $59.48 per share, or $17,999,000, as determined by an independent third party appraiser, detachable warrants to purchase 350,000 shares of the Company's common stock with an estimated fair value of $874,000 (see Note 2), and transaction costs of $990,000. The excess by which the stated value of the Series C Preferred Stock exceeds its carrying value is being accreted to the earliest redemption date using the effective interest method. This accretion is recorded as dividends in the accompanying consolidated statements of operations. Additionally, the holders of the Series C Preferred Stock are entitled to receive dividends at an annual rate of 8.625% of the stated value, compounding quarterly. The discount accretion and the dividends on the Series C Preferred Stock are included in the carrying value of the Series C Preferred Stock in the accompanying consolidated balance sheets.

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        The rights and preferences relating to dividends and distributions upon liquidation of the Series C Preferred Shares are senior to those of the common stock. The holders of the Series C Preferred Stock have the right to receive in a liquidation, dissolution or winding up of the Company, after payment to the holders of the outstanding shares of the Company's Series A Preferred Stock and before any payments to holders of junior stock, which includes the common stock, an amount per share equal to the stated value plus the greater of accrued dividends or the participation amount (defined as an amount based on 10% of the increase in the market value of the Company's common stock for the period from the Acquisition Date until the date of liquidation, dissolution or winding up of the Company). The liquidation value of the Series C Preferred Stock as of March 31, 2002 was $20,273,000.

        The acquisition has been accounted for under the purchase method of accounting, and the results of operations of iMaternity are included in the Company's results of operations from the Acquisition Date. Prior period results have not been restated. Assets acquired and liabilities assumed have been recorded at their estimated fair values. The recorded values of assets acquired and liabilities assumed are preliminary and subject to adjustment pending final determination of their acquisition values.

        Based on the preliminary allocation of purchase price, the application of the purchase method resulted in approximately $25,785,000 of excess purchase price over the estimated fair value of the net tangible assets acquired of $8,926,000 less costs to exit certain operations and locations of iMaternity and related fixed asset writedowns totaling $14,848,000. The Company recognizes that certain identifiable intangible assets were acquired, primarily trademarks, trade names, and Internet domain names. However, as determined by an independent third party appraiser, based on the nature of the items and use within the Company's business and industry, no value was assigned to any of the identifiable intangibles. Accordingly, the excess purchase price has been assigned to goodwill.

        In connection with the purchase price allocation, the fair value of the acquired finished goods inventory was based on an estimate of the net realizable value of the inventory less estimated costs to dispose. A significant portion of the acquired inventory is expected to be sold at substantial discounts in connection with store closures or required changes in assortment mix at the acquired stores to align with the Company's merchandising strategies.

        Additionally, as part of the purchase price allocation, the Company recorded $1.7 million of vendor-related liabilities that were not disclosed by the sellers at the Acquisition Date. Further, there are also amounts being claimed as due from iMaternity by a number of vendors that are currently being investigated, but which have not yet been established as legal liabilities as of the Acquisition Date and, accordingly, have not been recorded. The amount of liabilities and goodwill recorded in the purchase price allocation could increase for additional vendor-related liabilities not yet identified. All of these liabilities are currently in dispute and the Company is seeking adjustment of the purchase price under the indemnification provisions of the acquisition agreement. Any adjustments, if obtained, would reduce the value of the Series C Preferred Stock and the corresponding goodwill recorded in connection with the transaction.

        At the Acquisition Date, iMaternity operated a total of 170 Dan Howard and Mothertime maternity clothing stores, including some under the trade name iMaternity, and the iMaternity.com website. The Company developed a plan in conjunction with the acquisition to close approximately 92

F-38



iMaternity stores and reopen the remaining acquired locations under the Company's existing store concepts of Motherhood and Mimi Maternity. Further, the plan included the shutdown of iMaternity's corporate headquarters and warehouse operation in Chicago, as well as its manufacturing and warehousing facilities in Costa Rica. In connection with the plan, the Company recorded severance costs for involuntarily terminated employees of the acquired business of $2,922,000, lease termination fees and related legal costs of $4,200,000, a writedown of fixed assets totaling $5,771,000 based on the remaining net book value of the assets to be disposed of or sold and the estimated sale proceeds, and accrued for other costs to be incurred to complete the exit activities of the acquired business totaling $1,955,000. Approximately 850 employees of the acquired business were expected to be terminated as part of the plan, consisting of 528 corporate and 322 store employees. The Company anticipates to substantially complete the entire integration plan within one year of the Acquisition Date.

        During the first six months of fiscal 2002, the Company closed 71 iMaternity stores of the 92 planned store closures, the corporate headquarters and warehouse operation in Chicago, an Internet-related development center in San Diego, California and other domestic warehousing facilities. The iMaternity manufacturing and warehousing operations in Costa Rica have been operationally shut down. The carrying value of the Costa Rica facility was reduced to its estimated realizable value as of the Acquisition Date, which was determined based on a market survey received from an independent third party, and is classified as "Assets Held for Sale" in the accompanying unaudited consolidated balance sheet as of March 31, 2002. In accordance with its plan, the Company expects to close an additional 21 store locations within the next six months. The timing of the store closures is dependent primarily upon the Company's ability to negotiate and complete the lease termination settlements.

        In connection with the store closures and the shutdown of the corporate headquarters and warehouse operation in Chicago, the Internet-related development center in San Diego, California, and the iMaternity manufacturing and warehousing operations in Costa Rica, the Company terminated 663 employees (524 corporate and 139 store employees), to whom $1,472,000 in accrued severance was paid out and charged against the liability during the six months ended March 31, 2002. Included in the severance payouts are quarterly installments made on the non-compete covenant and severance arrangement with a former executive of iMaternity. As of March 31, 2002, the remaining severance accrual of $1,450,000 principally reflects the balance of the non-compete and severance arrangement of $900,000 that is payable ratably over the next 4.5 years. Also included in the accrual are severance and vacation payouts anticipated to be made in regards to the approximately 70 store employees that may be terminated upon the closure of the remaining 21 store locations, as planned.

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        A summary of the charges and reserves recorded in connection with the iMaternity acquisition exit/restructuring activities during the first six months of fiscal 2002 is as follows (in thousands):

 
  Adjustments and
Reserves Recorded in
Purchase Accounting

  Charges
  Balance as of
March 31, 2002

Lease termination fees   $ 4,200   $ 1,235   $ 2,965
Severance     2,922     1,472     1,450
Exit and other costs     1,955     1,200     755
   
 
 
      9,077   $ 3,907   $ 5,170
   
 
 
Fixed asset writedowns     5,771            
   
           
    $ 14,848            
   
           

        The following table displays the net non-cash assets that were acquired as a result of the iMaternity acquisition (in thousands):

Non-cash assets (liabilities):        
  Inventory   $ 6,168  
  Property, plant and equipment     3,612  
  Deferred income taxes     10,043  
  Other current assets     753  
  Goodwill     25,785  
  Current liabilities     (19,170 )
  Debt     (8,892 )
   
 
  Net non-cash assets acquired     18,299  
  Less: Preferred stock issued     (17,999 )
              Warrants issued     (874 )
   
 
  Cash acquired from the acquisition of iMaternity   $ (574 )
   
 

        The following unaudited pro forma summary (in thousands, except per share amounts) combines the consolidated results of operations of Mothers Work, Inc. and iMaternity as if the transaction occurred as of the beginning of the respective periods presented giving effect to certain adjustments including recognition of an income tax benefit for operating losses generated by the acquired business, recognition of accrued and unpaid dividends on the Series C Preferred Stock, discount accretion associated with the Series C Preferred Stock, and reduction in depreciation expense as a result of the revaluation of property, plant and equipment. This pro forma summary is not necessarily indicative of the results of operations that would have occurred if the Company and iMaternity had been combined

F-40



during such periods. Moreover, the pro forma summary is not intended to be indicative of the results of operations that may be attained in the future.

 
  For the Six Months Ended
March 31,

 
 
  2002
  2001
 
 
  (in thousands except per share amounts)

 
Revenue   $ 221,447   $ 215,355  
Operating income     11,523     3,695  
Net income (loss)     2,708     (2,688 )
Net income (loss) available to common stockholders     1,088     (4,451 )
Income (loss) per share — basic   $ 0.31   $ (1.29 )
Income (loss) per share — diluted   $ 0.29   $ (1.29 )

        The sales from the acquired stores planned for closure was approximately $5.6 million during the first six months of fiscal 2002.

9.    OTHER RESTRUCTURING CHARGES

        During fiscal 1998, the Company announced that it would close or convert all of its non-maternity Episode stores into maternity clothing stores. In connection with the restructuring plan, the Company recorded accrued restructuring charges of $10.6 million. As of March 31, 2002 and September 30, 2001, the $0.1 million remaining reserve will be used for any final legal and other lease transfer fees.

10.    IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS

        In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 is effective for fiscal years beginning after June 15, 2002, and addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. Although early adoption is encouraged, the Company plans to adopt this statement in fiscal 2003. Adoption of SFAS No. 143 is not expected to have a material impact on the Company's financial position or results of operations.

        In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which establishes a single accounting model, based on the framework established in SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of," and resolves significant implementation issues related to SFAS No. 121. SFAS No. 144 superceded SFAS No. 121 and Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations — Reporting the Effects of a Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS No. 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001 and early adoption is encouraged. The Company plans to adopt this statement in fiscal 2003. Management believes that the adoption of SFAS No. 144 will not have a material impact on the Company's financial position or results of operations.

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11.    SUBSEQUENT EVENTS

        On June 10, 2002, the Company filed two registration statements with the Securities and Exchange Commission (the "SEC"), one of which relates to the offering of 1,100,000 shares, which includes 100,000 shares being sold by selling stockholders, and one of which relates to the offering of $125 million of senior notes due 2010. The equity offering is not contingent on the debt offering, but the debt offering is contingent on the equity offering. The Company plans to use the net proceeds from these offerings to repay the existing Notes, to repay subordinated notes issued to the holders of Series A Preferred Stock in lieu of accrued and unpaid dividends, to pay all accrued and unpaid dividends on Series A Preferred Stock and Series C Preferred Stock, to redeem all outstanding shares of Series A Preferred Stock and to purchase all outstanding shares of Series C Preferred Stock, to repay outstanding borrowings under the Credit Facility and for general corporate purposes. There can be no assurance that either of these offerings will be completed or that they will generate net proceeds sufficient for these planned uses.

        Payment obligations under the $125 million of senior notes due 2010 offered by the Company in the debt offering will be fully and unconditionally guaranteed on a joint and several basis by its wholly-owned U.S. subsidiaries (the "Guarantor Subsidiaries"). None of the Company's foreign subsidiaries will guarantee the notes. Condensed consolidating financial information for the Company, the Guarantor Subsidiaries and the Company's non-guarantor subsidiaries as of and for the six months ended March 31, 2002 is presented below.

F-42



Mothers Work, Inc.
Condensed Consolidating Balance Sheet
March 31, 2002
(Unaudited)
(in thousands)

 
  Mothers
Work
(Parent
Company)

  Guarantor
Companies
(U.S.
Companies)

  Non-
Guarantor
Companies
(Foreign
Companies)

  Consolidating
Eliminations

  Mothers
Work
Consolidated

ASSETS                              
Current Assets:                              
  Cash and cash equivalents   $ 2,451   $ 242   $ 68   $   $ 2,761
  Trade receivables     4,346     1,297             5,643
  Inventories     64,490     3,493     110         68,093
  Deferred income taxes     7,954                 7,954
  Prepaid expenses and other current assets     3,582                 3,582
   
 
 
 
 
    Total current assets     82,823     5,032     178         88,033
 
Property, Plant and Equipment, net

 

 

44,682

 

 

1,741

 

 

149

 

 


 

 

46,572
  Assets Held for Sale             1,575         1,575
  Other Assets     37,505     408         34,465     72,378
  Investments in and advances to (from) affiliates     40,524     105,522     (1,994 )   (144,052 )  
   
 
 
 
 
        Total assets   $ 205,534   $ 112,703   $ (92 ) $ (109,587 ) $ 208,558
   
 
 
 
 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

 

 

 
Current Liabilities:                              
  Line of credit   $ 20,367   $   $   $   $ 20,367
  Current portion of long-term debt     434                 434
  Accounts payable     18,363                 18,363
  Accrued expenses and other current liabilities     21,077     (2,100 )   (46 )   5,170     24,101
   
 
 
 
 
    Total current liabilities     60,241     (2,100 )   (46 )   5,170     63,265
  Long-Term Debt     98,182                 98,182
  Accrued Dividends on Series A Preferred Stock     5,652                 5,652
  Deferred Rent     4,999                 4,999
  Series C cumulative redeemable preferred stock     18,880                 18,880
  Stockholders' Equity                              
    Series A Preferred Stock     7,819                 7,819
    Common stockholders' equity     9,761     114,803     (46 )   (114,757 )   9,761
   
 
 
 
 
      Total stockholders' equity     17,580     114,803     (46 )   (114,757 )   17,580
   
 
 
 
 
    Total liabilities and stockholders' equity   $ 205,534   $ 112,703   $ (92 ) $ (109,587 ) $ 208,558
   
 
 
 
 

F-43



Mothers Work, Inc.
Condensed Consolidating Statement of Operations
For The Six Months Ended March 31, 2002
(Unaudited)
(in thousands)

 
  Mothers
Work
(Parent Company)

  Guarantor
Companies
(U.S. Companies)

  Non-Guarantor
Companies
(Foreign
Companies)

  Consolidating
Eliminations

  Mothers
Work
Consolidated

 
Net sales   $ 205,839   $ 26,772   $ 347   $ (13,708 ) $ 219,250  
Cost of goods sold     91,066     14,393     176         105,635  
   
 
 
 
 
 
Gross profit     114,773     12,379     171     (13,708 )   113,615  
Selling, general and administrative expenses     96,812     17,902     245     (13,708 )   101,251  
   
 
 
 
 
 
  Operating income (loss)     17,961     (5,523 )   (74 )       12,364  
Interest income (expense)     (7,020 )   2,726         (2,726 )   (7,020 )
Equity in earnings (loss) of subsidiaries     (4,003 )           4,003      
   
 
 
 
 
 
Income (loss) before income taxes     6,938     (2,797 )   (74 )   1,277     5,344  
Income tax provision (benefit)     3,582     (1,566 )   (28 )       1,988  
   
 
 
 
 
 
Net income (loss)     3,356     (1,231 )   (46 )   1,277     3,356  
Dividends on preferred stock     1,533                 1,533  
   
 
 
 
 
 
Net income (loss) available to common stockholders   $ 1,823   $ (1,231 ) $ (46 ) $ 1,277   $ 1,823  
   
 
 
 
 
 

F-44



Mothers Work, Inc.
Condensed Consolidating Cash Flow Statement
For The Six Months Ended March 31, 2002
(Unaudited)
(in thousands)

 
  Mothers
Work
(Parent Company)

  Guarantor
Companies
(U.S. Companies)

  Non-Guarantor
Companies
(Foreign
Companies)

  Consolidating
Eliminations

  Mothers
Work
Consolidated

 
Cash Flows from Operating Activites:                                
Net income (loss)   $ 3,356   $ (1,231 ) $ (46 ) $ 1,277   $ 3,356  
Adjustments to reconcile net income to net cash provided by operating activities:                                
  Depreciation and amortization     4,737     145     2         4,884  
  Accretion of discount on Notes     1,737                 1,737  
  Deferred taxes     250                 250  
  Amortization of deferred financing costs     106                 106  
  Provision for deferred rent     144                 144  
Changes in assets and liabilities:                                
  Decrease (increase) in—                                
    Receivables     775     (1,297 )           (522 )
    Inventories     (463 )   11,628             11,165  
    Prepaid expenses and other assets     1,184                 1,184  
    Intercompany balance     (7,257 )   16,482     371     (9,596 )    
  Increase (decrease) in—                                
    Accounts payable, accrued expenses and other current liabilities     (859 )   (9,104 )           (9,963 )
   
 
 
 
 
 
      Net cash provided by (used in) operating activities     3,710     16,623     327     (8,319 )   12,341  
   
 
 
 
 
 
Cash Flows from Investing Activities:                                
  Acquisition of iMaternity, net of cash acquired         (7,486 )   (259 )   8,319     574  
  Capital expenditures     (3,236 )               (3,236 )
  Purchase of intangible assets     (79 )               (79 )
   
 
 
 
 
 
      Net cash (used in) provided by investing activities     (3,315 )   (7,486 )   (259 )   8,319     (2,741 )
   
 
 
 
 
 
Cash Flows from Financing Activities:                                
  Reduction of borrowings under line of credit     (8,289 )               (8,289 )
  (Repayment) increase of long-term debt     (158 )               (158 )
  Repayment of debt assumed in acquisition of iMaternity         (8,892 )           (8,892 )
  Proceeds from exercise of options     142                 142  
   
 
 
 
 
 
      Net cash used in financing activities     (8,305 )   (8,892 )           (17,197 )
   
 
 
 
 
 
Net Increase (Decrease) in Cash and Cash Equivalents     (7,910 )   245     68         (7,597 )
Cash and Cash Equivalents, Beginning of Period     10,361     (3 )           10,358  
   
 
 
 
 
 
Cash and Cash Equivalents, End of Period   $ 2,451   $ 242   $ 68   $   $ 2,761  
   
 
 
 
 
 

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PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 14. Other Expenses of Issuance and Distribution.

        Our estimated expenses payable by us in connection with the issuance and distribution of the securities being registered are estimated (except for the SEC filing fees) as listed below.

  SEC Registration Fee   $ 11,500
  NASD Filing Fee   $ 13,000
*Legal Fees   $ 300,000
*Printing, Engraving and EDGAR   $ 100,000
*Accounting Fees and Expenses   $ 105,000
*Other Expenses   $ 27,000
   
  Total   $ 556,500
   

*
Estimated

Item 15. Indemnification of Directors and Officers.

        Section 145 of the Delaware General Corporation Law permits a Delaware corporation to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that such person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if such person acted in good faith and in a manner reasonably believed to be in or not opposed to the best interests of the corporation, and with respect to any criminal action or proceeding, had no reasonable cause to believe that his conduct was unlawful. In the case of an action other than an action by or in the right of the corporation, the termination of such action by judgment, order, settlement, conviction, or upon plea of nolo contendere or its equivalent, does not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful.

        In the case of an action by or in the right of the corporation, Section 145 empowers a corporation to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action in any of the capacities set forth above against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to our best interests, except that indemnification is not permitted in respect of any claim, issue or matter as to which such person is adjudged to be liable to the corporation unless and only to the extent that the Delaware Court of Chancery, or the court in which such action or suit was brought determines upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court deems proper.

        Section 145 further provides that: (i) a Delaware corporation is required to indemnify a director, officer, employee or agent against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with any action, suit or proceeding or in defense of any claim, issue or matter

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therein as to which such person has been successful on the merits or otherwise, (ii) indemnification provided for by Section 145 shall not be deemed exclusive of any other rights to which the indemnified party may be entitled, (iii) indemnification provided for by Section 145 shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of such person's heirs, executors and administrators and (iv) empowers the corporation to purchase and maintain insurance on behalf of a director or officer against any such liability asserted against him in any such capacity or arising out of his status as such whether or not the corporation would have the power to indemnify him against liability under Section 145. A Delaware corporation may provide indemnification only as authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances because he has met the applicable standard of conduct. This determination is to be made (i) by the Board of Directors by a majority vote of a quorum consisting of directors who were not party to such action, suit or proceeding, (ii) if such a quorum is not obtainable, or, even if obtainable a quorum of disinterested directors so directs, by independent legal counsel in a written opinion or (iii) by stockholders.

        Article Twelve of our certificate of incorporation provides that we shall, to the full extent permitted by the Delaware General Corporation Law, as amended from time to time, indemnify all persons which we have the power to indemnify pursuant thereto. In addition, Article V, Section 1 of our By-Laws provides that each person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that he or she is or was one of our directors, officers, employees or agents or is or was serving at our request as a director, officer, employee or agent of another company or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, shall be indemnified and held harmless by us to the fullest extent authorized by the Delaware General Corporation Law, as the same exists or may hereafter be amended (but, in the case of such amendment, only to the extent that such amendment permits us to provide broader indemnification rights that said law permitted us to provide prior to such amendment), against all expenses (including attorneys' fees, judgments, fines and amounts paid or to be paid in settlement) reasonably incurred or suffered by such person in connection therewith. Article V, Section 5 of our By-Laws provides that expenses incurred by an officer or director in defending a civil, criminal, administrative or investigative action, suit or proceeding may be paid by us in advance of final disposition upon receipt of an undertaking by or on behalf of such person to repay such amount if it ultimately is determined that he is not entitled to be indemnified by us. We may, by action of our Board of Directors, provide indemnification to our employees and agents with the same scope and effect as the foregoing indemnification of directors and officers. The foregoing right to indemnification and advancement of expenses is not exclusive.

        Our directors and officers are covered by policies of insurance under which they are insured, within limits and subject to certain limitations, against certain expenses incurred in connection with the defense of actions, suits or proceedings, and certain liabilities which might be incurred as a result of such actions, suits or proceedings, in which they are parties by reason of being or having been directors or officers. We are also insured with respect to certain payments that we might be required to make to our directors or officers under applicable statutes and our certificate of incorporation.

        Additionally, Article Thirteen of our certificate of incorporation limits the liability of our directors under certain circumstances. Article Thirteen provides that a director shall have no personal liability to us or our stockholders for monetary damages for breach of his or her fiduciary duty as a director, provided, however, that Article Thirteen does not eliminate or limit the liability of a director (i) for any breach of the director's duty of loyalty to us or our stockholders; (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of a law; (iii) for the unlawful payment of dividends or unlawful stock repurchases under Section 174 of the General Corporation Law

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of the State of Delaware or (iv) for any transaction from which the director derived an improper personal benefit.

        For the undertakings with respect to indemnification, see Item 17 herein.

Item 16. Exhibits

1.1 * Form of Underwriting Agreement

4.2

*

Form of Indenture

5.1

*

Opinion of Pepper Hamilton LLP

12.1

**

Calculation of Ratio of Earnings to Fixed Charges

16

***

Letter regarding change in certifying accountant

23.1

 

Consent of KPMG LLP

23.2

 

Consent of Deloitte & Touche LLP

23.3

 

Consent of Pepper Hamilton LLP (included in the opinion filed as Exhibit 5.1)

24

 

Powers of Attorney of the additional registrants are included on the signature pages; the Power of Attorney of the registrant was previously filed

25.1

*

Statement of Eligibility of Trustee on Form T-1

*
To be filed by amendment or as an exhibit to a Current Report on Form 8-K.

**
Previously filed.

***
Incorporated by reference to Exhibit 16 to the Company's Current Report on Form 8-K (0-21196) filed with the SEC on June 6, 2002.

Item 17. Undertakings

        Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.

        The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (and where, applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

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SIGNATURES

        Pursuant to the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Philadelphia, Commonwealth of Pennsylvania, on July 18, 2002.

    MOTHERS WORK, INC.

 

 

 

 

 

 

By:

    /s/  
DAN W. MATTHIAS      
Dan W. Matthias
Chairman of the Board and Chief Executive Officer

        Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.


    /s/  
DAN W. MATTHIAS      
Dan W. Matthias

 

Chairman of the Board and Chief Executive Officer (the principal executive officer)

 

July 18, 2002

*

Rebecca C. Matthias

 

President, Chief Operating Officer and Director

 

July 18, 2002

*

Edward M. Krell

 

Senior Vice President—Chief Financial Officer (the principal financial officer and the principal accounting officer)

 

July 18, 2002

*

Joseph A. Goldblum

 

Director

 

July 18, 2002

*

Elam M. Hitchner, III

 

Director

 

July 18, 2002

*

David Schlessinger

 

Director

 

July 18, 2002

*

William A. Schwartz, Jr.

 

Director

 

July 18, 2002

*

Stanley C. Tuttleman

 

Director

 

July 18, 2002

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*By:

 

/s/  
DAN W. MATTHIAS      
Dan W. Matthias
Attorney-in-Fact

 

 

 

 

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QuickLinks

TABLE OF ADDITIONAL REGISTRANTS
TABLE OF CONTENTS
FORWARD-LOOKING STATEMENTS
PROSPECTUS SUMMARY
Recent Developments
RISK FACTORS
USE OF PROCEEDS
CAPITALIZATION
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BUSINESS
MANAGEMENT
PRINCIPAL STOCKHOLDERS
RELATED PARTY TRANSACTIONS
DESCRIPTION OF CERTAIN INDEBTEDNESS AND PREFERRED STOCK
DESCRIPTION OF NOTES
MATERIAL U.S. FEDERAL TAX CONSIDERATIONS
UNDERWRITING
NOTICE TO CANADIAN RESIDENTS
LEGAL MATTERS
EXPERTS
WHERE YOU CAN FIND ADDITIONAL INFORMATION
INCORPORATION OF DOCUMENTS BY REFERENCE
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS MOTHERS WORK, INC. AND SUBSIDIARIES
INDEPENDENT AUDITORS' REPORT
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
MOTHERS WORK, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS (in thousands, except share amounts)
MOTHERS WORK, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts)
MOTHERS WORK, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands)
MOTHERS WORK, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
MOTHERS WORK, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MOTHERS WORK, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share amounts)
MOTHERS WORK, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) (unaudited)
MOTHERS WORK, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)
MOTHERS WORK, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2002 (unaudited)
Mothers Work, Inc. Condensed Consolidating Balance Sheet March 31, 2002 (Unaudited) (in thousands)
Mothers Work, Inc. Condensed Consolidating Statement of Operations For The Six Months Ended March 31, 2002 (Unaudited) (in thousands)
Mothers Work, Inc. Condensed Consolidating Cash Flow Statement For The Six Months Ended March 31, 2002 (Unaudited) (in thousands)
PART II INFORMATION NOT REQUIRED IN PROSPECTUS
SIGNATURES