(unaudited)
`
`Net income (loss), as reported
`Add: goodwill impairment expense, net of tax
`Adjusted net income (loss), before goodwill impairment expense
`Add: stock-based compensation expense, net of tax
`Add: restructuring and other charges. net oftax
`Add: loss on cxtinguishmcnt of dcbt, not of tax
`Adjusted net income, before goodwill impairment expense, stock-based
`compensation expense, restructuring and other charges, and loss on
`extinguishrnent of debt
`Net income (loss) per share—Diluted, as reported
`Average shares outstanding Diluted, as reported (1)
`Adjustcd nct income (loss) per sharc—Dilutcd, bcforc goodwill impairmcnt cxpcnsc
`Average shares outsta11ding—Diluted (1)
`Adjusted net income per share—Diluted, before goodwill impairment expense,
`stock-based compensation expense, restructuring and other charges. and loss
`on cxtinguishrncnt of dcbt
`Average shares outstanding—Dil11ted
`
`2012
`
`$19,372
`—
`19,372
`1,472
`
`14
`
`$20,858
`$
`1.46
`13,267
`1.46
`13,267
`
`SE
`
`Year Ended September 302
`2010
`2009
`
`2011
`
`$22988
`—
`22,988
`1,467
`120
`23
`
`$24,598
`$
`1.75
`13,120
`1.75
`13,120
`
`$
`
`$16829
`—
`16,829
`1,210
`3,514
`32
`
`$21,585
`$
`1.33
`12,691
`1.33
`12691
`
`$
`
`$(40,682)
`50,389
`9,707
`1,253
`968
`76
`
`$ 12,004
`$
`13.39)
`11,985
`0.80
`12,135
`
`SE
`
`2008
`
`$(1,389)
`—
`(1,389)
`1,430
`2,171
`61
`
`$ 2,273
`$ (0.12)
`11.849
`$ (0.12)
`11,849
`
`$
`
`1.57
`13,267
`
`$
`
`1.87
`13,120
`
`$
`
`1.70
`12,691
`
`$
`
`0.99
`12,135
`
`$
`
`0.19
`12,096
`
`(1)
`
`For fiscal years with net loss or adjusted net loss, diluted shares reflect the elimination of the dilutive impact of outstanding stock options
`and restricted stock.
`
`37
`
`Item 7.
`Overview
`
`Management’s Discussion and Analysis of Financial Condition and Results of Operations
`
`The following discussion should be read ir1 conjunction with the consolidated fir1ar1cial statements and their related notes included
`elsewhere i11 this report.
`Wc arc thc lcading dcsigncr a11d rctailcr ofmatcrnity apparcl in thc Unitcd Statcs with 2,008 rctail locations, including 625 stores in all 50
`states, Puerto Rico and Canada, and 1,383 leased departments located within department stores and baby specialty stores throughout the United
`States a11d Puerto Rico. We are also tl1e exclusive provider ofmaternity apparel to Kohl’s, which operates approximately 1,146 stores throughout
`the United States. We operate our stores under the Motherhood Maternity, A Pea in the Pod and Destination Maternity retail nameplates. We are
`the exclusive maternity apparel provider in each of our leased department relationships. We have expanded internationally and have entered into
`cxclusivc storc franchisc and product supply rclationships in thc Middle East, India and South Korea. As of Scptcmbcr 30, 2012. wc have 119
`international franchised locations, conrprised of 16 stand-alone stores in the Middle East, South Korea and India operated under one of o11r retail
`narneplates, and 103 shop-i11-shop locations in India and South Korea in which we have a Company branded department operated under retail
`narneplates owned by our franchise partners. Finally, we also sell merchandise on the Internet, primarily through DestinationMatemity.com and
`our various brand—specific websites. We design and contract manufacture over 90% of the merchandise we sell using sewing factories located
`throughout thc world, predominantly outside of thc Unitcd Statcs. Substantially all of thc mcrchandisc produccd outside of thc Lnitcd Statcs is
`paid for in United States dollars.
`In assessing the performance of our business, we consider a variety of operational a11d financial measures. The key measures for determining
`how our business is performing are net income determined in accordance with generally accepted accounting principles (“GAAP net income”) and
`the corresponding net income (or earnings) per share (diluted), 11et income before stock-based compensation expense, restructuring and other
`charges, and loss on extinguislmient of debt (“.\Ion-GAAP adjusted net income”) and the corresponding earnings per share (diluted), Adjusted
`EBITDA, net sales, and comparable sales (which consists of comparable store sales and Internet sales). Adjusted EBITDA represents operating
`income before deduction for the following non—cash charges: (i) depreciation and amortization expense; (ii) loss on impairment of tangible and
`intangible assets: (iii) loss on disposal ofassets; and (iv) stock-based compensation expense.
`Following is a summary ofour fiscal 2012 results with regard to each of the key measures noted above:
`
`Source: Destnnation ivlaternity Corp, 10~’v<, 1271/V2012 | Powered by Intelllgize
`
`
`
`DMC Exhibit 2041_O86
`
`Target v. DMC
`|PR2013-00530, 531, 532, 533
`
`

`
`Fiscal 2012 Fimmciul Results
`
`°
`
`°
`
`°
`°
`
`°
`
`GAAP 11et income for fiscal 2012 was $19.4 million, a 1 % decrease compared to GAAP net income of $23.0 million for fiscal 2011. GAAP
`.
`diluted earnings per share for fiscal 201 2 was $1 .46, a 17% decrease compared to GAAP diluted earnings per share of $1 .75 for fiscal 201 l
`Non—GAAP adjusted net income for fiscal 2012 was $20.9 million, a 15% decrease compared to comparably adjusted Non—GAAP net income
`of $24.6 million for fiscal 2011. Non—GAAP diluted earnings per share for fiscal 2012 was $1.57, a 16% decrease compared to Non—GAAP
`diluted earnings per share of$1.87 for fiscal 2011.
`Adjusted EBITDA was $49.9 million for fiscal 2012, an 8% decrease compared to $54.4 million of Adjusted EBITDA for fiscal 2011.
`Net sales for fiscal 2012 decreased 0.7% to S541.5 million from $545.4 million for fiscal 2011.
`
`Comparable sales for fiscal 2012 decreased 0.3% versus a comparable sales increase of 0.1% for fiscal 2011.
`38
`
`Results of Operations
`The following table sets forth certain operating data from our consolidated statements ofincome as a percentage of net sales and as a
`percentage change for t11e periods indicated:
`
`Net sales
`Cost of goods sold (2)
`Gross profit
`Selling. general and administrative expenses (3)
`Storc closing, asset impairment and asset disposal cxpenscs
`Restructuring and other charges
`Operating income
`Interest expense, net
`Loss on extinguishment of debt
`Income before income taxes
`Income tax provision
`Net i11Co111e
`
`% ofNet Sales (1)
`
`Year Ended September 30:
`
`2012
`
`100.0%
`E
`53.7
`47.2
`0.4
`i
`6.1
`0.2
`w
`5.9
`2.3
`3.6%
`
`2011
`
`100.0%
`45.6
`54.4
`47.2
`0.2
`0.0
`7 0
`0 4
`0 0
`6.6
`2 4
`4.2%
`
`2010
`
`100.0%
`45.2
`54.8
`47.4
`0.4
`1.1
`5.9
`0.6
`0.0
`5.3
`2.1
`3.2%
`
`% Period to Period
`Favorable (ynfavorahle)
`Year Ended September
`30:
`2012
`2011
`VS.
`VS.
`2011
`2010
`
`(0.7)%
`(0.9)
`(2.1)
`0.7
`(90.9)
`100.0
`(13.4)
`45.6
`40.5
`(11.4)
`3.8
`(1 5.7)%
`
`2.7%
`(3.5)
`2.0
`(2.3)
`54.5
`96.6
`21.7
`32.3
`27.5
`28.1
`(15.4)
`36.6%
`
`( 1)
`(2)
`
`Components may not add to total due to rounding.
`The “cost of goods sold” line item includes: merchandise costs (including customs duty expenses), expenses related to inventory shrinkage,
`
`Source: Destination ivlaternity Corp, 10~K, 12/14!2Q12.
`
`| Powered by Intelllgize
`
`DMC Exhibit 2041_O87
`
`Target v. DMC
`|PR2013-00530, 531, 532, 533
`
`

`
`(3)
`
`product-related corporate expenses (including expenses related to our payroll, benefit costs and operating expenses of our buying
`departnrents), inventory reserves (including lower‘ of cost or rrrarket reserves), inbound freight charges, purchasing and receiving costs,
`inspection costs, warehousing costs, internal transfer costs, and the other costs of our distribution network.
`The “selling, general and administrativc cxpcnscs” linc item includes: advertising and marketing cxpcnscs, corporatc administrativc
`expenses, store expenses (including store payroll and store occupancy expenses), and store opening expenses.
`The following tables set forth certain information regarding the number of our retail locations and international franchised locations, for the
`fiscal years indicated. Retail locations include stores and leased maternity apparel departments and exclude locations where Kohl’s sells our
`products under an exclusive product and license agreement and international franchised locations.
`
`Retail Locations (1)
`Beginning of period
`Opened
`Closed
`End ofperiod
`
`2012
`
`Leased
`Departments
`1,694
`13
`(324)
`1,383
`
`Total
`Retail
`Locations
`2,352
`21
`(365)
`2,008
`
`Stores
`658
`8
`(41)
`625
`
`Year Ended September 30:
`2011
`Total
`Retail
`Locations
`1,725
`706
`(79)
`2,352
`
`Leased
`Departments
`1,027
`694
`(27)
`1,694
`
`Stores
`698
`12
`(52)
`658
`
`2010
`
`Leased
`Departments
`360
`680
`(13)
`1,027
`
`Total
`Retail
`Locations
`1.084
`691
`(50)
`1.725
`
`Stores
`724
`11
`(37)
`698
`
`( 1)
`
`Excludes (i) locations where Kohl’s sells our products under an exclusive product and license agreement, and (ii) international franchised
`locations.
`
`39
`
`2012
`
`Stores
`
`Shop-in-Shop
`Locations
`
`Total
`International
`Franchised
`Locations
`
`Year Ended September 30,
`2011
`
`Stores
`
`Shop-in-Shop
`Locations
`
`Total
`International
`Franchised
`Locations
`
`2010
`
`Stores
`
`Shop-in-Shop
`Locations
`
`15
`2
`(1)
`16
`
`51
`54
`(2)
`103
`
`66
`56
`(3)
`119
`
`8
`7
`—
`15
`
`B
`29
`(1)
`51
`
`31
`36
`(1)
`66
`
`1
`7
`—
`8
`
`7
`16
`—
`Z3
`
`Total
`International
`Franchised
`Locations
`
`8
`23
`—
`31
`
`International
`Franchised Locations
`
`Beginning of period
`Opened
`Closed
`End ofperiod
`
`In fiscal 2012 we also operated leased departments in Babies“R”Us stores. However, in connection with our new broad—based partnership
`with Bed Bath & Bcyond Inc. and its subsidiary, Buy Buy Baby, 1nc., (which we announced in May 2012) we discontinucd operation of our 124
`remaining leased departments ir1 Babies“R”Us 111 late October 2012 and opened leased departments in select buybuy BABY stores. As of
`November 30, 2012 we operate 10 leased departments in buybuy BABY stores. As 0fAugust 25, 2012, Bed Bath & Beyond Inc. had 71 buybuy
`BABY stores. Over time, we expect to significantly increase the number of buybuy BABY stores in which we have a maternity apparel leased
`department.
`
`Year Ended September 30, 2012 Compared to Year Ended September 30, 2011
`Net Sales. Our net sales for fiscal 2012 decreased by 0.7% or $3.9 million. to $541.5 million from $545 .4 million for fiscal 2011. Comparable
`sales decreased 0.3% during fiscal 2012 versus a comparable sales increase of0. l % during fiscal 201 l
`. The decrease in total reported sales for
`fiscal 2012 compared to fiscal 2011 resulted primarily from decreased sales related to our continued efforts to close underperforming stores and
`
`1'
`Source: Destination iv1ater'nity Corp, 10-K, 12/1~’%!2-
`
`:12
`
`I Powered by Intelligize
`
`DMC Exhibit 2041_O88
`
`Target v. DMC
`|PR2013-00530, 531, 532, 533
`
`

`
`decreased sales from our licensed relationship, partially offset by increased sales due to the full-year impact of the expansion of our maternity
`apparel leased department relationship with Macy’s in the second quarter of fiscal 2011.
`As of September 30, 2012, we operated a total of 625 stores and 2,008 total retail locations: 507 Motherhood Maternity stores (including 84
`Motherhood Maternity Outlet stores), 36 A Pea in thc 1’od stores, 82 Destination Maternity stores, and 1,383 leased matcrnity apparel
`departments, of which 515 were in Sears stores under the Two Hearts Maternity brand and the balance were in other department stores and baby
`specialty stores, primarily under the Motherhood brand. In addition, our Oh Baby by Motherhood collection is available at Kohl’s stores
`throughout the United States. In comparison, as of September 30, 2011, we operated a total of 658 stores and 2,352 total retail locations: 535
`Motherhood Maternity stores (including 85 Motherhood Maternity Outlet stores), 43 A Pea in the Pod stores, 80 Destination Maternity stores,
`and 1,694 leased maternity apparel departments. The decrease in leased department locations at September 30, 2012 versus September 30, 2011
`predominantly reflects the closing of our remaining 29] Kmart leased department locations in October 201 l . As of September 30, 2012, our store
`total included 82 Destination Maternity nrulti-brand stores, including 50 Destination Maternity corrrbo stores and 32 Destination Maternity
`superstores. In comparison, as of September 30, 2011, we operated 80 Destination Maternity multi-brarrd stores, including 52 Destination Maternity
`combo stores and 28 Destination Maternity superstores. During fiscal 2012, we opened eight stores, including six Destination Maternity stores,
`and closed 41 stores, with 12 of these store closings related to Dcstination Maternity store openings. In addition, during fiscal 2012, we opened 13
`leased department locations and closed 324 leased department locations, reflecting the closing of our remaining 291 Kmart leased department
`locations in October 201 1 .
`
`Gross Profit. Our gross profit for fiscal 2012 decreased by 2.1%, or $6.2 million, to $290.7 million compared to $296.9 million for fiscal 2011,
`and our gross profit as a percentage of net sales (gross margin) for fiscal 2012 was 53.7% compared to 54.4% for fiscal 2011. The decrease in gross
`profit for fiscal 2012 compared to fiscal 2011 was due primarily to our lower gross rrrargin, and to a lesser extent, lower gross profit due to our
`decreased sales. The decrease in gross margin for fiscal 2012 compared to fiscal 2011 was primarily due to lower
`40
`
`merchandise margin driven by higher product costs and somewhat higher levels of promotional activity and markdowns.
`Selling, General and Administrative Expenses. Our selling, general and administrative expenses for fiscal 2012 decreased by 0.7%, or $1.8
`million, to $255.6 million from $257.4 million for fiscal 2011. As a percentage of net sales, selling, general and administrative expenses was 47.2% for
`both fiscal 2012 and fiscal 2011. 'lhe slight decrease in expense for fiscal 2012 compared to fiscal 2011 resulted primarily from lower expenses
`related to our continued efforts to close nnderperforming stores (primarily payroll and occupancy costs), our continued tight expense controls,
`and lower‘ variable incentive compensation expense, substantially offset by higher expenses related to the operation of our additional Maey’s
`leased department locations (primarily payroll and employee benefit costs, and percentage of net sales occupancy payments to Macy’s) and
`higher advertising and marketing expenses.
`Store Clori/zg, ,4 met Impairment and/lmet Di.xp(7.x'a1Evcperzser. Our store closing, asset impairment and asset disposal expenses for fiscal
`2012 increased by approximately S1.0 million, to $2.0 million from $1.0 million for fiscal 2011, which primarily reflected higher impairment charges for
`write-downs oflong-lived assets.
`Restructuring and Other Charges. In fiscal 2011, we incurred pretax expense of $0.2 million for relocation costs in connection with the hiring
`of our new President. We did not incur any restructuring and other charges in fiscal 2012.
`Operating Income. Our operating income for fiscal 2012 decreased by 13.4%, or $5.1 million, to $33.1 million from $38.2 million for fiscal 2011.
`r\.m«..+:..,. :..,m...,\ /\/V /\ v\/\w</\/\v\fnI\'r\ /\"‘il\'\" /Vnl/\N +‘.w +‘.m...1 "NH '3 /I/\I\w</'\nNr\/*1 +n L 10/. Fww...
`'1 no/. Par +‘.m...l ’)I\1 1
`'I'l..,\ /lr\/\v~«\nrV/\ :94 n.m.~..+:..,. :94/I/\v\n'\ M“!
`
`Source: Destination Maternity Corp, 10—K, 12/14/2012 | Powered by Intelligize
`
`DMC Exhibit 2041_O89
`
`Target v. DMC
`|PR2013-00530, 531, 532, 533
`
`

`
`/.U"/0 1UI 1lSU'(l1 LU1 1. 1116 LICK/'I'C'(lSCl lIl UIJC1"(ll1Ilg lIlCUIIlE! '(lIlLl
`lJpCI"(lllIlg 1IlUUIIlC3 ‘(IS ‘(I PCIK/'CIll'(lgC U1 Iltil 521165 101' 1150211 1.'U1L LIUUICHSCLI IU 0.1“/D 1I'UIIl
`operating income percentage was primarily due to our lower gross profit and lower gross margin.
`Interest Expense, Net. Our net interest expense for fiscal 2012 decreased by 45.6%, or $1.0 million, to $1.2 million from $2.2 million in fiscal
`201 1 . This decrease was due to our lower debt level, primarily as a result of the $1 5.0 million of Term Loan prepayments we made in fiscal 2012 and
`the $12.6 million of Te1n1 Loan prepayments we 111ade in fiscal 2011, a11d to a lesser extent, lower interest rates. Duri11g fiscal 2012 a11d 2011, we did
`not have any direct borrowings under our credit facility and we did not have any direct borrowings outstanding as of September 30, 2012.
`Loss on Extirzguishmezzt 0fDebt. During fiscal 2012, wc prcpaid $15.0 million principal amount of our outstanding Tcrm Loan, which rcsultcd
`in pretax charges of $22,000, representing the write-off ofunamortized deferred financing costs. During fiscal 201 1, we prepaid $12.6 million
`principal amount of our outstanding Term Loan, which resulted in pretax charges totaling $37,000.
`Income Taxes. For fiscal 2012, our effective tax rate was 39.2% compared to 36.1% for fiscal 2011. Our effective tax rate for fiscal 2012 was
`higher than the statutory federal tax rate of35% primarily due to the effect of state income taxes, net of federal tax benefit, and to a lesser extent,
`additional income tax expense (including interest a11d penalties) recognized as required by the acco11nti11g standard for uncertain i11co111e tax
`positions. Our effective tax rate for fiscal 2011 was slightly higher than the statutory federal tax rate of 35% primarily due to the effect of state
`income taxes, net of federal benefit, on our pretax income for fiscal 2011, partially offset by reductions of state income tax expense, net of federal
`expense, of $0.9 million recorded in the second quarter of fiscal 2011, which were related to settlements of uncertain income tax positions. See Note
`15 ofthc Notes to Consolidated Financial Statcmcnts, includcd clscwhcrc in this rcport, for the reconciliation of thc statutory fcdcral income tax
`rate to our effective tax rate.
`
`Net Income. Net income for fiscal 2012 decreased by 15.7%, to $19.4 million from $23.0 million for fiscal 2011. Net income per sl1are (diluted)
`for fiscal 2012 dccrcascd by 16.6%, to $1.46 per share from $1.75 per share in fiscal 2011. Net income for fiscal 2012 i11c1udcs (11ct of tax) stock-bascd
`compensation expense of$l .5 million and loss on extinguishment of debt of $14,000. Net income for fiscal 201 1 includes (net oftax) stock—based
`compensation expense of $1.5 million, restructuring and other charges of $0.1 million, a11d loss on exti11g11islm1e11t of debt of $23,000. Before stock-
`based con1pensatio11 expense, restructuring and other charges,
`
`41
`
`and loss on extinguishment of debt, our fiscal 201 2 net income was $20 .9 million or $1 .57 per share (diluted) compared to $24.6 million or $1 .87 per
`share (diluted) for fiscal 2011.
`Our average diluted shares outstanding of 13.3 million for fiscal 2012 was 1.1% higher than the 13.1 million average diluted shares
`outstanding for fiscal 2011. The increase in average shares outstanding reflects the higher shares outstanding i11 fiscal 2012 compared to fiscal
`201 1, primarily as a result of the exercise of stock options and vesting of restricted stock, slightly offset by lower dilutive impact ofoutstanding
`stock options a11d restricted stock for fiscal 2012 compared to fiscal 2011.
`Following is a reconciliation of net income and net income per share (diluted) (“Diluted EPS”) to net income and Diluted EPS before stock-
`based compensation expense, restructuring and other charges, and loss on extinguishment of debt for the years ended September 30, 201 2 and
`2011 (i11 thousands, except per share a111o1111ts):
`
`As reported
`Add: stock—based compensation expense, net of tax
`Add: restructuring and otl1cr chargcs, net of tax
`Add: loss on extinguishment of debt, net oftax
`As adjusted before stock—based compensation expense, restructuring and other
`charges, and loss on extinguishment of debt
`
`Year Ended
`September 30. 2012
`Net
`Diluted
`Diluted
`Income
`Shares
`EPS
`
`Year Ended
`September 30. 2011
`Net
`Diluted
`Diluted
`Income
`Shares
`EPS
`
`$ 1.46
`
`$19,372
`1,472
`—
`14
`
`13,267
`—
`—
`—
`
`$ 1.75
`
`$22,988
`1,467
`120
`Z3
`
`13,120
`—
`—
`—
`
`$20,858
`
`13,267
`
`$ 1.57
`
`$24,598
`
`13,120
`
`$ 1.87
`
`Source: Destination ivlaternity Corp, 10~’v<, 12,/14!20:l2.
`
`| Powered by Intelllgize
`
`DMC Exhibit 2041_O90
`
`Target v. DMC
`|PR2013-00530, 531, 532, 533
`
`

`
`Year Ended September 30, 2011 Compared to Year Ended September 30, 2010
`Net Sales. Our net sales for fiscal 2011 increased by 2.7% or S14.2 million, to $545 .4 million from $531.2 million for fiscal 2010. Comparable
`sales increased 0.1% during fiscal 2011 versus a comparable sales decrease of 3.4% during fiscal 2010. The increase in total reported sales for fiscal
`2011 compared to fiscal 2010 resulted primarily from increased sales due to the expansion of our maternity apparel leased department relationship
`with Macy’s, partially offset by decreased sales related to our continued efforts to close underperforming stores.
`As of September 30, 2011, we operated a total of 658 stores and 2,352 total retail locations: 535 Motherhood Maternity stores (including 85
`Motherhood Maternity Outlet stores), 43 A Pea in the Pod stores, 80 Destination Maternity stores, and 1,694 leased maternity apparel
`departments, of which 821 were in Sears and Kmart stores under the Two Ilearts Maternity brand and the balance were in other department stores
`and baby specialty stores, primarily under the Motherhood brand. In addition, our O11 Baby by Motherhood collection is available at Kohl’s stores
`throughout the United States. In comparison, as of September 30, 2010, we operated a total of 698 stores and 1,027 total retail locations: 567
`Motherhood Maternity stores (including 84 Motherhood Matemity Outlet stores), 56 A Pea in the Pod stores, 75 Destination Maternity stores,
`and 1,027 leased maternity apparel departments. The increase in leased department locations at September 30, 201 1 versus September 30, 2010
`predominantly reflects the opening of 5 16 leased department locations in January and February 2011 for our Macy’s expansion, and an additional
`168 Sears and Kmart leased department locations in October 2010. As of September 30, 201 1, our store total included 80 Destination Maternity
`multi-brand stores, including 52 Destination Maternity combo stores and 28 Destination Maternity superstores. In comparison, as of September 30,
`2010, we operated 75 Destination Maternity multi-brand stores, including 49 Destination Maternity combo stores and 26 Destination Maternity
`superstores. During fiscal 2011, we opened 12 stores, including 7 Destination Maternity stores, and closed 52 stores, with 11 of these store
`closings related to Destination Maternity store openings. In addition. during fiscal 2011, we opened 694 leased department locations and closed 27
`leased department locations.
`Gross Profit. Our gross profit for fiscal 2011 increased by 2.0%, or $5.9 million, to $296.9 million compared to $291.0 million for fiscal 2010. and
`our gross profit as a percentage of net sales (gross margin) for
`
`42
`
`fiscal 2011 was 54.4% compared to 54.8% for fiscal 2010. The increase in gross profit for fiscal 2011 compared to fiscal 2010 was primarily due to our
`increased sales, partially offset by the slightly lower gross margin, which resulted primarily from higher promotional activity and markdowns, and
`to a much lesser extent, from higher product costs for Fall 2011 merchandise.
`Selling, General and Administrative Expenses. Our selling, general and administrative expenses for fiscal 2011 increased by 2.3%, or
`approximately $5.7 million, to $257.4 million from S251.7 million for fiscal 2010. As a percentage ofnet sales, selling, general and administrative
`expenses for fiscal 2011 decreased to 47.2% compared to 47.4% for fiscal 2010. The increase in expense for fiscal 2011 compared to fiscal 2010
`resulted primarily from higher expenses related to the launch and operation of our additional Macy’s leased department locations (primarily payroll
`and employee benefit costs, and percentage ofnet sales occupancy payments to Macy’s) and increased legal expenses, partially offset by lower
`variable incentive compensation expense and our continued expense control initiatives. The decrease in expense percentage for fiscal 2011 reflects
`the favorable leverage from our increased sales and our continued expense control initiatives.
`Store Closing, Asset Impairment and Asset Disposal Expenses. Our store closing, asset impairment and asset disposal expenses for fiscal
`2011 decreased by approxirnately $1.3 million, to $1.0 million fiom $2.3 million for fiscal 2010, which p1’in1a1‘ilyreflected lower in1pain11er1t charges for
`write-downs oflong-lived assets.
`Restructuring and Ot/ier Charges. ln fiscal 2011, we incurred pretax expense of $0.2 million from our management transition. In fiscal 2010,
`we incurred pretax expense of $5.7 million from our strategic restructuring, cost reduction and other initiatives, and our management transition. See
`“Restructuring a11d Other Charges” ir1 this Item 7 below for a detailed description of these charges.
`l')vmv/vrivzn I1/v/‘r114/ml flnr nnprnrinn irmnmp fnr fiqnnl 701 1
`innnancp/*1 11v '71 70,/.. nr ‘RR R millinn tn ‘C132 7 millinn finm (21 A millinn fnr fiqonl 7010
`
`Source: Destination Maternity Corp, 10—K, 12/14/2012 | Powered by Intelligize
`
`DMC Exhibit 2041_O91
`
`Target v. DMC
`|PR2013-00530, 531, 532, 533
`
`

`
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`Operating income as a percentage ofnet sales for fiscal 2011 increased to 7.0% from 5.9% for fiscal 2010. The increase in operating income was
`primarily due to our higher gross profit and significantly lower restructuring and other charges, partially offset by higher selling, general and
`administrative expenses. The increase in operating income percentage was primarily due to our significantly lower restructuring and other charges.
`Interest Expense, Net. Our net interest expense for fiscal 2011 decreased by 32.3%, or $1.1 million, to $2.2 million from $3.3 million in fiscal
`2010. This decrease was due to our lower debt level, primarily as a result of the $12.6 million of Term Loan prepayments we made in fiscal 2011 and
`the $11.0 million of Term Loan prepayments we 111ade in fiscal 2010, and to a u1ucl1 lesser extent, lower interest rates. During fiscal 2011, we did 11ot
`have any direct borrowings under our credit facility and we did not have any direct borrowings outstanding as of September 30, 2011. During fiscal
`2010, our average daily level of direct borrowings under our credit facility was $0.4 million.
`I,0s.v on Extinguislzrnent «7fDeI:t. During fiscal 201 1, we prepaid $12.6 million principal amount of our outstanding Term Loan, which resulted
`i11 pretax charges of $37,000, represeutirrg the write-off of unamortized deferred financing costs. During fiscal 2010, we prepaid $l1.0111illio11
`principal amount of our outstanding Term Loan, which resulted in pretax charges totaling $51,000.
`Ineome Taxes. For fiscal 201 1, our effective tax rate was 36.1% compared to 40.1% for fiscal 2010. Our effective tax rate for fiscal 201 1 was
`slightly higher than the statutory federal tax rate of 35% primarily due to the effect of state income taxes, net of federal benefit, on our pretax
`income for fiscal 2011, partially offset by reductions of state income tax expense, net of federal expense, of $0.9 million recorded in the second
`quarter of fiscal 2011, which were related to settlements of uncertain income tax positions. Our effective tax rate for fiscal 2010 was higher than the
`statutory federal tax rate of 35% primarily due to the effect of state income taxes, net of federal benefit, and additional income tax expense
`(including interest a11d pcnaltics) recognized as required by the accounting standard for unccrtain incomc tax positions. Scc Note 15 of the Notes
`to Consolidated Financial Statements, included elsewhere in this report, for the reconciliation of the statutory federal income tax rate to o11r
`effective tax rate.
`
`Net Income. Net income for fiscal 2011 increased by 36.6%. to $23.0 million from $16.8 million for fiscal 2010. Net income per share (diluted)
`for fiscal 201 1 increased by 31 .6%, to $1.75 per share from $1.33 per share
`43
`
`in fiscal 2010. Net income for fiscal 2011 includes (net of tax) stock—based compensation expense of $1.5 million, restructuring and other charges of
`$0.1 million, and loss on extinguishment of debt of $23,000. Net i11come for fiscal 2010 includes (net oftax) stock—based compensation expense of
`$1 .2 million, restructuring and other charges of $3.5 million, and loss on extinguishment of debt of $3 2,000. Before stock—based compensation
`expense, restructurirrg and other charges, and loss o11 extinguishment of debt, our fiscal 2011 net income was $24.6 million or $1.87 per share
`(diluted) compared to $21.6 million or $1.70 per share (diluted) for fiscal 2010.
`Our average diluted shares outstanding of 13.1 million for fiscal 2011 was 3.4% higher than the 12.7 million average diluted shares
`outstanding for fiscal 2010. The increase in average shares outstanding reflects the higher shares outstanding in fiscal 201 1 compared to fiscal
`2010, primarily as a result of the exercise of stock options and vesting of restricted stock, slightly offset by lower dilutive impact of outstanding
`stock options a11d restricted stock for fiscal 2011 compared to fiscal 2010.
`Following is a reconciliation ofnet income and Diluted EPS to net income and Diluted EPS before stock—based compensation expense,
`restructurirrg and other charges, and loss on extinguishment of debt for the years ended September 30, 2011 and 2010 (i11 thousands, except per
`share amounts):
`
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`
`Source: Destination Maternity Corp, 10—K, 12/14/2012 | Powered by Intelligize
`
`DMC Exhibit 2041_092
`
`Target v. DMC
`|PR2013-00530, 531, 532, 533
`
`

`
`As reported
`Add: stock-based compensation expense, net of tax
`Add: restructuring and other charges, net oftax
`Add: loss o11 extinguishnlent of debt, 11et of tax
`As adjusted before stock-based compensation expense, restructuring a11d other
`charges, a11d loss on extingnishrnent of debt
`
`September 30. 2011
`Net
`Diluted
`Income
`Shares
`
`Diluted
`EPS
`
`September 30. 2010
`Net
`Diluted
`Diluted
`Income
`Shares
`EPS
`
`$ 1.75
`
`$22,988
`1,467
`120
`B
`
`13,120
`—
`—
`—
`
`$ 1.33
`
`$16,829
`1,210
`3,514
`32
`
`12,691
`—
`—
`—
`
`$24,598
`
`13,120
`
`$ 1.87
`
`$21,585
`
`12,691
`
`$ 1.70
`
`Restructuring and Other Charges
`In July 2008, we announced that we were streamlining our merchandise brands and store nameplates and implementing cost reductions in
`order to simplify our business model, reduce overhead costs and improve and tighten our merchandise assortments. and during fiscal 2009 we
`began to implement actions to achieve further cost reductions. The objectives of our restructuring and cost reduction program were to improve
`and simplify critical processes, consolidate activities and infrastructure, and reduce our expense structure. As of September 30, 2010, we had
`completed the planned activities of these initiatives and we incurred $3.9 million of pretax expense substantially related to these initiatives in fiscal
`2010, primarily for consulting services. These initiatives resulted in approximate pretax savings of $12 million in fiscal 2009, with incremental pretax
`savings of approximately $11 million in fiscal 2010 and an additional approximately $6 million in fiscal 2011. Thus we estimated that we realized total
`prctax savings of approximately $29 million in fiscal 2011 as a rcsult of our cost reduction initiatives, which included thc savings rcalizcd i11 fiscal
`2009 and fiscal 2010.
`
`After his retirement on September 30, 2008, Dan Matthias, our former Chief Executive Officer (“Former CEO”), agreed to continue to serve us
`as a director and as no11-executive Chairman of the Board of Directors and agreed to remain available to us in an advisory capacity through
`September 2012. For these services, we agreed to pay the Former CEO a11 annual retainer of $200,000 through September 2012. In November 2009,
`tl1e Forrner CEO e11tered i11to a letter agreement with us, which confinned that he would not seek reelection to tl1e Board of Directors (and,
`therefore, would no longer serve as our non-executive Chairman of the Board) after the expiration of his term in January 2010. The letter agreement
`did not change the terms of payment under the annual retainer for advisory services, however we incurred a pretax charge of $0.6 million in fiscal
`2010, representing the amount due for the remaining term of the arrangement.
`
`44
`
`In connection with the retirement of Rebecca Matthias. our former President and Chief Creative Officer, at the end of fiscal 2010, we incurred
`a pretax charge of $0.9 million in fiscal 2010. The charge reflects benefit costs related to an amendment to the executives supplemental retirement
`agreement with us.
`111 April 2011. we announccd the hiring of Chris l_)anicl as our President effective June 1, 2011. ln conncction with our efforts to hire a new
`President, we incurred pretax charges of $0.2 million in fiscal 2011 for relocation