DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES
`
`CONSOLIDATED STATEMENTS OF OPERATIONS
`
`(in thousands, except per share amounts)
`
`Net sales
`Cost of goods sold
`Gross profit
`Selling, general and aclrninistrative expenses
`Store closing, asset impairment and asset disposal expenses
`Restructuring and other charges
`Operating income
`Interest expense, net
`Loss on extinguishment of debt
`Income (loss) before income taxes
`Incomc tax provision (bcnciit)
`Net income (loss)
`Net income (loss) per s11are—Basic
`Average shares oulslanLling—Basic
`Net income (loss) per share—Di1uted
`Average shares 0utstanding—J_)i1uted
`
`Year Ended September 30,
`2003
`2007
`2006
`$564,602
`$581,371
`$602,744
`281,561
`281,155
`288,082
`283,041
`300,216
`314,662
`271,592
`279,719
`279,713
`2,916
`1,788
`4,621
`3,461
`—
`—
`5,072
`18,709
`30,328
`6,974
`9,848
`14,534
`97
`9,423
`873
`(1,999 )
`(562 )
`14,921
`(610 )
`(169 )
`5,819
`(1.389 ) ES
`(393 ) 31>’
`9,102
`(0.23 ) $
`(0.07 )
`1.70
`5,924
`5,802
`5,348
`(0.23 ) $
`(0.07 ) $
`1.63
`5,924
`5,802
`5,591
`
`5:’
`$
`
`$
`
`The accompanying notes are an integral part ofthese Consolidated Financial Statements.
`
`F-4
`
`Source: DESTINATION MATERNITY CORR, 10-K, 12/15/2008 I Powered by Intelligize
`
`DMC Exhibit 2039_O65
`
`Target v. DMC
`|PR2013-00530, 531, 532, 533
`
`

`
`DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES
`
`CONSOLIDATED STATEMENTS OF STOCKHOLDERS‘ EQUITY
`AND COMPREHENSIVE INCOME (LOSS)
`
`(in thousands)
`
`Bala11ce as of September 30, 2005
`Net income
`Comprehensive income
`Stock—based compensation
`Exercise of stock options
`Excess tax bcncfit from stock option cxcrciscs
`Balance as of September 30, 2006
`Net loss
`I11itial prior service cost for retiren1e11t plans, net of tax
`Amortization of prior service cost for retirement plans, net of tax
`Change in fair value of interest rate swap, net of tax
`Unrealized loss on investments, net of tax
`Comprehensive loss
`Stock-bascd compcnsation
`Exercise of stock options
`Excess tax benefit from stock option exercises
`Reclassification of equity award from liabilities
`Balance as of September 30, 2007
`Net loss
`Amortization of prior service cost for retirement plans. net of tax
`Rctircmcnt plan amcndmcnt, 11ct of tax
`Change in fair value ofinterest rate swap, net of tax
`Unrealized gain o11 investments, net of tax
`Comprehensive loss
`Cumulative effect of adoption of FIN No. 48 (Note 13)
`Stock—based compensation
`Exercise of stock options
`Tax benefit shortfall from stock option exercises and restricted stock
`vesting
`Repurchase and retirement of common shares
`Balance as of September 30, 2008
`
`Comprehensive
`Income (Loss)
`
`Total
`— $63,328
`— 9,102 $
`$
`
`9,102
`9,102
`
`(393)
`
`126
`(325)
`(3)
`(595)
`
`(1,389)
`192
`393
`(556)
`3
`(1,357)
`
`Accumulated
`Common Stock
`Other
`Additional
`Number
`Retained Comprehensive
`Paid—in
`of
`Earnings
`Loss
`Shares Amount Capital
`5,269 $
`53 S 63,164 $
`111
`—
`—
`— 9,102
`
`$
`
`—
`355
`—
`5,624
`—
`—
`—
`—
`—
`
`121
`218
`—
`—
`5,963
`—
`—
`—
`—
`—
`
`—
`41
`74
`
`—
`3
`—
`56
`—
`—
`—
`—
`—
`
`1
`3
`—
`—
`60
`—
`—
`—
`—
`—
`
`—
`—
`1
`
`—
`
`1,374
`4.910
`—
`1,983
`9,213
`71,431
`— (393)
`—
`—
`—
`—
`—
`—
`—
`—
`
`—
`2,100
`—
`3,734
`—
`2,360
`—
`1,422
`8,820
`81,047
`— (1,389)
`—
`—
`—
`—
`—
`—
`—
`—
`
`—
`2,281
`691
`
`74
`—
`—
`
`— 1,374
`4,913
`— 1,983
`— 80,700
`— (393) $
`(1,202)
`(1,202)
`126
`126
`(325)
`(325)
`(3)
`(3)
`
`$
`
`— 2,101
`— 3,737
`— 2,360
`— 1,422
`(1,404) 88,523
`— (1,389) $
`192
`192
`393
`393
`(556)
`(556)
`3
`3
`
`$
`
`74
`—
`— 2,281
`—
`692
`
`—
`(627)
`—
`—
`—
`(118)
`(7) —
`6,071 $
`61 S 83,274 $ 7,505 $
`
`— (627)
`— (118)
`(l,372)$89,468
`
`The accompanying notes are an integral part of these Consolidated Financial Statements.
`
`F-5
`
`Source: DESTINATION MATERNITY CORR, 10-K, 12/’15/2008 | Powered by Intelligize
`
`DMC Exhibit 2039_O66
`
`Target v. DMC
`|PR2013-00530, 531, 532, 533
`
`

`
`DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES
`
`CONSOLIDATED STATEMENTS OF CASH FLOWS
`
`(in thousands)
`
`Cash Flows from Operating Activities
`Net income (loss)
`Adjustments to reconcile net income (loss) to net cash provided by operating activities:
`Dcprcciation and amortization
`Stock-based compensation expense
`Loss on impairment oflong-lived assets
`(Gain) loss on disposal of assets
`Loss on extinguishment of debt
`Accretion of discount on notes
`Deferred income tax provision (benefit)
`Amortization of deferred financing costs
`Changes in assets and liabilities:
`Decrease (increase) in
`Trade receivables
`Inventories
`Prepaid expenses and other current assets
`Other non—current assets
`Increase (decrease) in—
`Accounts payable, accrued expenses and other current liabilities
`Deferred rent and other non—current liabilities
`Net cash provided by operating activities
`Cash Flows from Investing Activities
`Purchase of short-term investments
`Proceeds fi’on1 sale of short-te1’n1 investmeiits
`Withdrawal from (contribution to) grantor trust
`Capital expenditures
`Proceeds fron1 sale of property, plant and equipment
`Proceeds from sale of assets held for sale
`Purchase of intangible assets
`Net cash used in investing activities
`Cash Flows from Financing Activities
`Increase (decrease) in cash overdrafts
`Proceeds from issuance oflong-term debt
`Repayment of long-term debt
`Premium on repurchase of long—term debt
`Dcfcrrcd financing costs
`Repurchase ofcomm on stock
`Proceeds from exercise of stock options
`Excess tax benefit from exercise of stock options
`Net cash used in financing activities
`Net Increase (Decrease) in Cash and Cash Equivalents
`Cash and Cash Equivalents, Beginning of Year
`Cash and Cash Equivalents, End of Year
`
`Year Ended September 30,
`2008
`2007
`2006
`
`35 (1,389 ) $
`
`(393 ) $ 9,102
`
`15,974
`2,281
`1,628
`546
`97
`—
`(969 )
`246
`
`5,009
`12,429
`(784 )
`247
`
`(14,702 )
`7,209
`27,822
`
`—
`—
`2,684
`(15,688 )
`—
`—
`(343 )
`(13,347 )
`
`1,524
`—
`(14,534 )
`
`(21 )
`(118 )
`692
`—
`(12,457 )
`2,018
`10,130
`$ 12,148
`
`16,410
`2,101
`1,781
`(422 )
`9.423
`89
`(3,067 )
`437
`
`(463 )
`(6,226 )
`1,788
`(44 )
`
`7,389
`(1,405 )
`27,398
`
`(19,550 )
`28,975
`2,662 )
`(15,444 )
`85
`493
`(9 )
`(8,112 )
`
`16.118
`2,796
`2,612
`(139)
`873
`186
`715
`689
`
`(3.950)
`11,652
`(3,579)
`13
`
`7,226
`(1,901)
`42.413
`
`(97,555)
`88,130
`—
`(13,933)
`—
`225
`(33)
`(23,166)
`
`(584 )
`90,000
`(116,039 )
`(6.469 )
`(1,065 )
`—
`3,737
`2,360
`(28,060 )
`(8,774 )
`18,904
`$ 10,130
`
`1,077
`—
`(10,770)
`(583)
`—
`—
`4,913
`1,983
`(3,380)
`15,867
`3,037
`$ 18,904
`
`The accompanying notes are an integral part of these Consolidated Financial Statements.
`
`F-6
`
`Source: DESTINATION MATERNITY CORR, 10-K, 12/'15/2038 | Powered by Intelligize
`
`DMC Exhibit 2039_O67
`
`Target v. DMC
`|PR2013-00530, 531, 532, 533
`
`

`
`DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES
`
`NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
`
`1. NATURE OF BUSINESS
`
`Destination Maternity Corporation (formerly Mothers Work, Inc.) and subsidiaries (the "Company") is a specialty designer and retailer of
`nraternity clothing. 011 December 8, 2008, the Company changed its corporate name from "Mothers Work, Inc." to "Destination Maternity
`Corporation." The name change was accomplished through the merger of a newly-forrned, wholly-owned subsidiary, DM Newco, Inc., into
`Mothers Work, Inc. The Company operated 1.032 retail locations as of September 30, 2008. including 754 stores and 278 leased departments,
`throughout the United States and Canada. In addition, the Company markets maternity apparel at Kohl’s® stores throughout the United States
`under an exclusive product and license agreement. The Company was incorporated in Delaware in 1982.
`
`2. SUMMARY OF SIGMFICANT ACCOLNTING POLICIES
`
`(1. Principles of Consolidation
`
`The accompanying consolidated financial statements include the accounts of the Company and its direct and indirect wholly-owned subsidiaries
`of Cave Springs, Ir1c., Mothers Vxlork Canada, Ir1c., Maternity Factory Warehouse Centre, Inc. (a wholly-ovvned subsidiary of Mothers Work
`Canada, Inc .), Mothers Work Services, Inc. and Confecciones Acona S.A. All significant intercompany transactions and accounts have been
`eliminated in consolidation.
`
`/1. Fiscal Year-End
`
`The Company operates on a fiscal year ending September 30 of each year. All references to fiscal years of the Company refer to the fiscal years
`ended 011 September 30 in those years. For example, the Company's "fiscal 2008" ended on September 30, 2008.
`
`c. Use 0fEstimutes
`
`The preparation of financial statements in conformity with accounting principles generally accepted i11 the United States requires rrrarragenrerrt to
`make certain estimates and assumptions that may 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.
`
`d Cash and Cash Equivalents
`
`Cash and cash equivalents include cash on hand, cash in the bank and short—terrn investments with an original maturity of three months or less
`when purchased. Cash overdratts of $4,830,000 and $3,306,000 were included in accounts payable as of September 30, 2008 and 2007, respectively.
`
`The Company maintains cash accounts that, at times, may exceed federally insured limits. The Company has not experienced any losses from
`nraintainirrg cash accounts in excess of such lirnits. Management believes that it is not exposed to any significant credit risks on its cash accorrrrts.
`
`e. Investments
`
`The Company's invcstmcnts may be classified as either held-to-maturity or available-for-sale. I-lcld-to-maturity securities are carried at amortized
`cost and represent those securities that the Company has both the intent and ability to hold to maturity. Available-for-sale securities are carried at
`fair value and are classified as such because these securities are not actively traded and do not meet the classification ofheld-to-maturity. Interest
`on investments, as well as amortization of discounts and
`
`F—7
`
`Source: DESTINATION MATERNITY CORP., 10-K, 12/15/2008 I Powered by Intelligize
`
`
`
`DMC Exhibit 2039_O68
`
`Target v. DMC
`|PR2013-00530, 531, 532, 533
`
`

`
`DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES
`
`NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
`
`2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
`
`premiums, is included in interest income. Unrealized gains and losses on available—for—sale securities are excluded from earnings and are reported
`as accumulated other comprehensive income (loss) until realized. When available-for-sale securities are sold, the cost of the securities is
`specifically identified and is used to determine the reali7ed gain or loss.
`
`f Inventories
`
`Inventories are valued at the lower of cost or market. Cost is determined by the "first-in, first-out“ (FIFO) method. Inventories of goods
`manufactured by the Company include the cost ofmaterials, freight, direct labor, and manufacturing and distribution overhead.
`
`g. Propeny, Plant and Equipment
`
`Property, plant and equipment are stated at cost. Depreciation and amortization are computed for financial reporting purposes on a straight—line
`basis, using service livcs ranging principally from five to ten years for furniture and equipment and forty years for the building. Leasehold
`improvements are amortized using the straight-line method over the shorter of tl1e lease term or their usefiil life. 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
`(loss). 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 evaluation 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 tl1e
`recorded asset, an impairment loss is recognized to reduce the carrying value of the asset. The amount of tl1e impairment loss is determined by
`comparing the discounted expected fi1ture casl1 flows with the carrying value.
`
`During fiscal 2008, 2007 and 2006, the Company recorded impairment write—downs of property, plant and equipment totaling $1,615,000, $1,776,000
`and $2,578,000, respectively, on a prc-tax basis.
`
`It. Goodwill and Intangible Assets
`
`Goodwill represents the excess of cost over the fair value of net assets acquired in business combinations. Goodwill is reviewed for impairment at
`least annually or when events or changes in circumstances indicate the carrying value of the goodwill might exceed the fair value in accordance
`with Statement of Financial Accounting Standards ("SFAS") No. l42, "Goodwill and Other Intangible Assets." Management determined that the
`Company has one reporting ur1it for purposes of applying SFAS No.l42 based o11 its reportirlg s11'ucture. Tl1e Company makes its assessment of
`impairment as of September 30 of each fiscal year. The fair value of tl1e Company's single reporting unit at each measurement date is determined
`based on a combination of the fair market value of the Company's outstanding common stock on a control basis, a discounted casl1 flow analysis
`and other generally accepted valuation methodologies and, if necessary, an outside independent valuation is obtained to determine the fair value.
`As part of the Company's impairment analysis as of September 30, 2008, an outside independent valuation was obtained and the fair value ofthe
`Company's single reporting 11nit exceeded tl1e carrying value.
`
`Based on these assessments, no impairment loss was required to be recognized at any of the measurement dates. The Company plans to perform
`an annual assessment for goodwill impairment at
`
`17-8
`
`Source: DESTINATION MATERNITY CORP., 10-K, 12/15/2008 I Powered by Intelligize
`
`DMC Exhibit 2039_O69
`
`Target v. DMC
`|PR2013-00530, 531, 532, 533
`
`

`
`DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES
`
`NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
`
`2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
`
`the end of each fiscal year or as impairment indicators arise. If the fair market value of the Company's outstanding common stock 011 a control basis
`were to significantly decline on a11 other than temporary basis, the goodwill would likely be impaired.
`
`Intangible assets with definite useful lives, which primarily consist of lea se acquisition costs and patents, are amortized over the shorter of their
`useful life or, if applicable, the lease term. Management reviews the carrying amount of these intangible assets as impairment indicators arise, to
`assess the continued recoverability based on future undiscounted cash flows and operating results from the related asset, fiiture asset utilization
`and changes in market conditions. During fiscal 2008, 2007 and 2006, the Company recorded write-downs of intangible assets totaling $13,000,
`$5,000 and $34.000, respectively, on a pre-tax basis. The Company has not identified any indefinite-lived intangible assets. Aggregate amortization
`expense of intangible assets in fiscal 2008, 2007 and 2006 was $119,000, $153,000 and $199,000, respectively.
`
`Estimated amortization expense for the next five fiscal years is as follows (i11 thousands):
`
`Fiscal Year
`
`2009
`2010
`201 1
`2012
`2013
`
`$133
`83
`70
`62
`55
`
`i. Interest Rate Derivatives
`
`The Company mitigates a portion of its floating rate interest risk on variable rate long-term debt through an interest rate swap agreement. In
`accordance with SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" and SFAS No. 138, "Accounting for Certain
`Derivative Instruments and Certain Hedging Activities,“ the Company recognizes the derivative on the balance sheet at fair value. On the date the
`derivative instrument was entered into the Company designated it as a hedge of the variability of cash flows to be received or paid related to a
`recognized asset or liability ("cash flow hedge"). Changes in the fair value ofa derivative that is designated as, and meets all the criteria for, a cash
`flow hedge are recorded in accumulated other comprehensive income (loss) and reclassified into earnings as the underlying hedged item affects
`earnings. The Company formally documents the relationship between hedging instruments and hedged items. The Company also formally
`assesses at the inception of the hedge and on a quarterly basis, whether the derivative is highly effective i11 offsetting changes in cash flows of
`the hedged item. Any portion of the change in fair value of the derivative associated with hedge ineffectiveness is included in current earni11gs. As
`ofSeptember 30, 2008 and for the year then ended, the Company‘s interest rate swap was determined to have no ineffectiveness.
`
`j. Deferred Firumeing Casts
`
`Deferred financing costs (see Note 9) are amortized to interest expense over the term of the related debt agreement. Amortization expense of
`dcfcrrcd financing costs in fiscal 2008, 2007 and 2006 was $246,000, $437,000 and $689,000, respectively. In connection with dcbt cxtinguishmcnts,
`in fiscal 2008, 2007 and 2006 the Company wrote off $97,000, $2,173,000 and $213,000 ofunamortired deferred financing costs (see Note 9).
`
`F-9
`
`Source: DESTINATION MATERNITY CORR,
`
`‘lO~K, 12/'15/2008 | Powered by Intelligize
`
`DMC Exhibit 2039_O70
`
`Target v. DMC
`|PR2013-00530, 531, 532, 533
`
`

`
`DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES
`
`NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
`
`2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
`
`Estimated amortization expense of deferred financing costs for the next five fiscal years is as follows (i11 thousands):
`
`Fiscal Year
`
`2009
`2010
`201 l
`2012
`2013
`
`$236
`235
`234
`168
`56
`
`k. Deferred Rent
`
`Rent expense on operating leases, including rent holidays a11d scheduled rent increases, is recorded on a straight-line basis over the term of the
`lease commencing on the date the Company takes possession of the leased property, which is generally four to six weeks prior to a store's opening
`date. The net excess of rent expense over the actual cash paid has been recorded as defcrrcd rent in the accompanying Consolidated Balance
`Sheets. Tenant improvement allowances received from landlords are also included in the accompanying Consolidated Balance Sheets as deferred
`rent liabilities and are amortized as a reduction of rent expense over the term of the lease from the possession date.
`
`L Treusury (Reacquired) Shares
`
`Shares repurchased are retired and treated as authorized but unissued shares, with the cost in excess ofpar value of the reacquired shares charged
`to additional paid-in capital and the par value charged to common stock.
`
`In Fair Value of Financial Instruments
`
`The carrying values of cash and cash equivalents, investments, trade receivables and accounts payable approximate fair value due to the short-
`term nature of those instruments. A substantial portion of the Company's long-term debt bears interest at variable rates. which adjust based on
`market conditions and the carrying value of the long-term debt approximates fair value. A portion of the Company's floating rate interest risk on
`variable rate long-term debt is mitigated through an interest rate swap agreement. As of September 30, 2008 and 2007, the estimated fair value of the
`interest rate swap was an unrealized loss of $(l,404.000) and $(480,000), respectively.
`
`n. Revenue Recognition, Sales Returns and Allowances
`
`Revenue is recognized at the point of sale for retail store sales, including leased department sales, or when merchandise is shipped to customers
`for licensed product, Internet and mail order sales. Allowances for returns are recorded as a reduction of revenue, based on the Company's
`historical experience. Revenues are recorded net of applicable sales taxes.
`
`0. Other Revenues
`
`Included in net sales are revenues earned by the Company through a variety of marketing partnership programs utilizing the Company's opt-in
`customer database and various in—store marketing initiatives, focused on baby and parent—related products and services.
`
`F- 10
`
`Source: DESTINATION MATERNITY CORR,
`
`‘lO~K, 12‘./'15/2008 | Powered by Intelligize
`
`DMC Exhibit 2039_O71
`
`Target v. DMC
`|PR2013-00530, 531, 532, 533
`
`

`
`DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES
`
`NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continuetl)
`
`2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
`
`p. Cast of Goods Sold
`
`Cost of goods sold in the accompanying Consolidated Statements of Operations includes: Inerchandise costs (including customs duty expenses),
`expenses related to inventory shrinkage, product-related corporate expenses (including expenses related to payroll, benefit costs a11d operating
`expenses of the Company's buying departments), inventory reserves (including lower of cost or market reserves), inbound freight charges,
`purchasing and receiving costs, inspection costs, warehousing costs, internal transfer costs, and the other costs of the Company's distribution
`network.
`
`q. Shipping and Handling Fees and Costs
`
`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 supplics, related
`labor costs and third-party shipping costs.
`
`r. Selling, General and Administrative Expenses
`
`Selling, general and administrative expenses in the accompanying Consolidated Statements of Operations includes: advertising and marketing
`expenses, corporate administrative expenses, store expenses (including store payroll and store occupancy expenses), and store opening expenses.
`
`s. Advertising Costs
`
`The Company expenses the costs of advertising when the advertising occurs. Advertising expenses were $9,279,000, $8,887,000 and $9,908,000 in
`fiscal 2008. 2007 and 2006, respectively.
`
`1?. Store Closing, Asset Impairment and Asset Disposal Expenses
`
`Store closing expenses include lease termination fees, gains or losses on disposal of closed store assets and recognition of unamortized deferred
`rent. Asset impairment expenses represent losses recognized to reduce the carrying value of impaired long-lived assets. Asset disposal expenses
`represent gains or losses on disposal of assets other than in connection with store closings, including assets disposed from remodeling or
`relocation of stores.
`
`u. Income Taxes
`
`The Company utilizes the asset and liability method of accounting for income taxes as prescribed by 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 as well as from net operating loss carryforwards. The effect on deferred tax
`assets and liabilities of a change in tax rates is recognized i11 operations in the period that includes the enactment date.
`
`The Company adopted the provisions of Financial Accounting Standards Board (“FASB") Interpretation ("FIN") No. 48, "Accounting for
`Uncertainty i11 Income Taxes" effective as of October l. 2007. Under PIN No. 48, recognition of a tax benefit occurs when a tax position is more-
`likely-than-not to be sustained upon examination, based solely 011 its technical merits. Dereeognition of a previously recognized tax position would
`occur ifit is subsequently determined that the tax position no longer meets the more-likely-than-not threshold ofbeing sustained. FI.\I No. 48 also
`provided guidance on the
`
`F-11
`
`Source: DESTINATION MATERNITY CORP., 10-K, 12/15/2008 I Powered by Intelligize
`
`
`
`DMC Exhibit 2039_072
`
`Target v. DMC
`|PR2013-00530, 531, 532, 533
`
`

`
`DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES
`
`NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
`
`2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
`
`measurement of uncertai11 tax positions. The Company records interest and penalties related to unrecognized tax benefits in income tax provision
`(benefit).
`
`v. Ernnings per Share
`
`Basic earnings per share (“Basic EPS“) is computed by dividing net income (loss) by the weighted average number of common shares outstanding,
`excluding rcstrictcd stock awards for which thc rcstrictions havc not lapscd. l_)ilutcd carnings pcr share (“Dilutcd l:'l’S") is computcd by dividing
`net income (loss) by the weighted average number of common shares outstanding, after giving effect to the potential dilution, if applicable, from
`the assumed lapse ofrestrictions on restricted stock awards and from the exercise of securities, such as stock options a11d warrants, into shares of
`common stock as if those securities were exercised (see Note 12).
`
`The following table summarizes those effects for the diluted earnings per share calculation (in thousands):
`
`Average n111nber of shares outstanding—Basic
`Incremental shares from the assumed lapse of restrictions on restricted stock awards
`Incremental shares from the assumed exercise of outstanding stock options
`Average number of shares outstanding—Diluted
`
`“U-
`
`Year Ended September 30,
`2008
`2007
`2006
`5,924
`5,802
`5,348
`—
`—
`5,924
`
`243
`5,591
`
`80
`
`N
`
`Stock options totaling 35,030 shares of the Company's common stock were outstanding as of September 30, 2006, but were not included in the
`computation of diluted carnings pcr share for fiscal 2006 as thcir effect would l1avc bccn antidilutivc. Options and rcstrictcd stock totaling
`1,039, 866 and 962,220 shares of the Company's common stock were outstanding as of September 30, 2008 and 2007, respectively, but were not
`included in the computation ofdiluled earnings per share for fiscal 2008 and 2007, due to the Company's net loss position. Had the Company
`reported a profit for fiscal 2008 and 2007, the average number of dilutive shares outstanding would have been approximately 6,048,000 and
`6,135,000. respectively.
`
`w. Statements af Cash Flows
`
`In fiscal 2008, 2007 and 2006, the Company paid interest of $7,169,000, $10,415,000 and $14,748,000, respectively, and made income tax payments,
`net of refunds, of $552,000, $(972,000) and $5,352,000, respectively.
`
`x. Business and Credit Risk
`
`Financial instruments, primarily cash and cash equivalents, investments and accounts receivable, potentially subject the Company to
`concentrations of credit risk. The Company limits its credit risk associated with casl1 and cash equivalents and investments by placing such
`investments in highly liquid funds and instruments. Receivables associated with third—part_y credit cards are processed by financial institutions,
`which are monitored for financial stability. The Company is dependent on key suppliers to provide sutficient quantities of inventory at competitive
`prices. No single supplier represented 10% or more of net purchases in fiscal 2008, 2007 or 2006. A significant majority ofthe Company's purchases
`during fiscal 2008, 2007 and 2006 were imported. Management believes that any event causing a disruption of imports from any specific country
`could be mitigated by moving production to readily available alternative sources.
`
`13- 12
`
`Source: DESTINATION MATERNITY CORR,
`
`‘lO~K, 12/'15/2008 | Powered by Intelligize
`
`
`
`DMC Exhibit 2039_O73
`
`Target v. DMC
`|PR2013-00530, 531, 532, 533
`
`

`
`DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES
`
`NOTES TO C‘ONSOI,IDATF.D FIVANCIAL STATEMENTS (Continued)
`
`2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
`
`y. Insurance
`
`The Company is self-insured for workers‘ compensation and employee-related health care benefits, up to certain stop-loss limits. Such costs are
`accrued based o11 known claims and an estimate of incurred but not reported clai111s. Further, tl1e Company utilizes a cooperative arrangement with
`a number of other companies to assist in managing certain insurance risks. The Company's expenses associated with this relationship could be
`impacted by the loss history associated with the cooperative as a whole. Liabilities associated with these risks are estimated by considering
`historical claims experience and other actuarial assumptions.
`
`z. Stnre Prenpening Casts
`
`Non—capital expenditures, such as payroll costs incurred prior to the opening of a new store, are charged to expense in the period in which they
`were incurred.
`
`aa. Reclaxsificatinnx
`
`Certain reclassifications have been made to the prior year consolidated financial statements to conform to the current year presentation.
`
`bb. New Accounting Pranatmcements
`
`In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." SFAS No. 157 defines fair value, establishes a fi‘amework for
`measuring fair value in U.S. generally accepted accounting principles, a11d expands disclosures about fair value measurements. SFAS No. 157 is
`effective for financial assets and liabilities that are measured at fair value on a recurring basis for financial statements issued for fiscal years
`beginning after November 15. 2007. and interim periods within those fiscal years. The FASB has issued a one—year deferral of SFAS No. 157's fair
`value measurement requirements for no11-financial assets and liabilities that are not required or permitted to be measured at fair value 011 a recurring
`basis. The adoption of SFAS No. 157 for financial assets and liabilities is not expected to have a material impact on the Company's consolidated
`financial position or results of operations. The impact fron1 adoption of SFAS No. 157 for non-financial assets and liabilities, if any, on the
`Company's consolidated financial position or results of operations has not yet been determined.
`
`In Fcbruary 2007, thc FASB issucd SFAS No. 159, "'1'hc Fair Valuc Option for Financial Assets and Financial Liabilities.“ SFAS N o. 159 providcs
`companies with an option to report selected financial assets and liabilities at fair value and requires entities to display the fair value of those assets
`a11d liabilities for which tl1e company has cl1ose11 to use fair vahle on tl1e face of the balance sheet. SFAS No. 159 is effective for financial
`statements issued for fiscal years beginning after November 15, 2007. The adoption of SFAS No. 159 is not expected to have a material impact on
`the Company's consolidated financial position or results of operations.
`
`In March 2008, thc FASB issucd SFAS No. 161, "1_)isc1osurcs about Dcrivativc lnstrumcnts and 1-lcdging Activitics—an amcndmcnt of FASB
`Statement No. 133." SFAS No. 161 requires companies to provide qualitative disclosures about the objectives and strategies for using derivatives,
`quantitative data about tl1e fair value of and gains and losses on derivative contracts, and details of credit-risk-related contingent features in
`hedged positions. SFAS No. 161 is effective for financial statements issued for fiscal years beginning afier November 15, 2008, and interim periods
`within those fiscal years. The adoption of SFAS No. 161 is not expected to have a material impact on the Company's consolidated financial
`position or results of opcrations.
`
`F-13
`
`Source: DESTINATION MATERNITY CORP., 10-K, 12/15/2008 I Powered by Intelligize
`
`DMC Exhibit 2039_O74
`
`Target v. DMC
`|PR2013-00530, 531, 532, 533
`
`

`
`DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES
`
`NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
`
`3. INVENTORIES
`
`Inventories as of September 30 were comprised of the following (i11 thousands):
`
`Finished goods
`Work-in-progress
`Raw materials
`
`2008
`
`2007
`
`$81,028
`2,904
`4,124
`$88,056
`
`$ 91,860
`2,947
`5,678
`$100,485
`
`4. PROPERTY, PLANT AND EQUIPMENT, l\ET
`
`Property, plant and equipment as of September 30 was comprised of tl1e following (in thousands):
`
`Land
`Building and improvements
`Furniture and equipment
`Leasehold improvements
`
`Less: accumulated depreciation and amortization
`
`39
`
`2008
`1,400
`13,469
`62,937
`105,657
`183,463
`(117,365 )
`$ 66,098
`
`$
`
`2007
`1,400
`13,009
`61,793
`104,030
`180,232
`(111,581)
`$ 68,651
`
`Furniture and equipment includes equipment acquired under a capital lease obligation on December 1, 2004. As of September 30, 2008, this
`equipment had a cost of $1, 107,000 and accumulated amortization of $830,000. During fiscal 2008, 2007 and 2006, the Company recorded pre-tax
`charges under SPAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," of$1,615,000, $1,776,000 and $2,578,000,
`respectively, related to the in1pairn1ent of leasehold inlprovernents a11d furniture a11d equipment at Certain of its retail locations.
`
`As of September 30, 2008 and 2007, $207,000 of assets (not included above) were separately reflected in the accompanying Consolidated Balance
`Sheets as "Assets held for sale.“ The Assets held for sale relate to manufacturing and warehouse facilities located in Costa Rica that were
`acquired a11d shut down in a fiscal 2002 business purchase. Two of these f