Notes to Financial Statements - Commitments and Contingencies
`
`Commitments and
`Contingencies
`Commitments and
`Contingencies
`
`12 Months Ended
`sep, 30, 2013
`C0\1l\/[ITMENTS AND CONTINGENCIES
`
`15.
`
`Tl1e Company leases its retail facilities and certain equipment under various non-cancelable
`operating leases. Certain of these leases have renewal options. Total rent expense (including related
`occupancy costs, such as insurance, maintenance and taxes, paid to landlords) under operating leases
`amounted to $61,253,000, $65,412,000 and $67,496,000 in fiscal 2013, 2012 and 2011, respectively. Such
`amounts include conti11gcnt rcntals based upon a pcrccntagc of salcs totaling $1,574,000, $1,428,000 and
`$1,563,000 in fiscal 2013, 2012 and 2011, respectively.
`
`In September 2013 the Company announced its plans to relocate its corporate headquarters and
`distribution operations from Philadelphia, Pennsylvania to southern New Jersey. The lease for the new
`corporate headquarters building was signed Scptcmbcr 19, 2013 and is cxpcctcd to commence in Fall 2014,
`and the lease for a new build-to-suit distribution center building was signed December 3, 2013 and is
`expected to commence in early to mid 2015. Future minimum payments for the two leases are included in
`the table below.
`
`Store, 011106 and distribution facility leases generally provide for payment of direct operating costs in
`addition to rent.
`
`1 5.
`
`COMMITMENTS AND CONTINGENCIES (Continued)
`
`Future annual minimum operating lease payments, excluding such direct operating costs, as well as
`leases for equipment rental as of September 30, 2013 are as follows (in thousands):
`
`Fis cal Yea 1'
`
`2014
`
`2015
`201 6
`2017
`
`2018
`2019 and thereafter‘
`
`$
`
`42.200
`
`33,704
`28,360
`23.447
`
`18,973
`72,732
`
`$ 219,416
`
`From ti111e to time, the Company is 11an1ed as a defendant in legal actions arising from normal
`business activities. Litigation is inherently unpredictable and although the amount of any liability that
`could arise with respect to currently pending actions cannot be accurately predicted, the Company does
`not believe that the resolution of any pending action will have a material adverse effect on its financial
`position, results of operations or liquidity.
`
`Source: Destination Maternity Corp, XBRL, 12/13/2013 | Powered by Intelligize
`
`DMC Exhibit 2042_131
`
`Target v. DMC
`|PR2013-00530, 531, 532, 533
`
`

`
`Notes to Financial Statements - Executive Officer Employment Agreements
`
`Executive Officer
`Employment Agreements
`(Employment Contracts)
`Employment Contracts
`
`Executive Officer Employment
`Agreements
`
`12 Months Ended
`
`Sep. 30, 2013
`
`1 6.
`
`EXECUTIVE OFFICER EMPLOYMENT AGREEMENTS
`
`The Company l1as an employment agreement with Edward M. Krell, the Company’s Chief Executive
`Off1eer(“CEO”). Mr. K_rell’s e1I1ploy111er1t agreement was amended o11 August 10, 2011 to i11crease
`Mr. Krell’s annual base salary from $650,000 to $750,000, effective December 1, 2010. On December 4, 2013,
`the Compensation Committee approved an increase to Mr. Krell’s annual base salary from $750,000 to
`$800,000. Base salary earned for Mr. Krell was $750,000, S750,000 and $733,000 for fiscal 2013, 2012 and
`2011. respectively. The agreement also provides for salary continuation and severance payments should
`the employment of the executive be terminated under specified conditions, as defined therein.
`Additionally, Mr. Krell is eligible for an annual casl1 bonus based on performance. The agreement
`continues in effect until terminated by either the Company or the executive in accordance with the
`termination provisions of the agreement.
`
`Effective June 1, 2011, the Company entered into an employment agreement with Christopher F.
`Daniel, in connection with the hiring of Mr. Daniel as the Company’s President. The agreement provided
`that Mr. Daniel’s annual base salary would be $525,000. 011 December 4, 2013, the Co111pe11satior1
`Committee approved an increase to Mr. Daniel’s annual base salary from $525,000 to $535,000. Base salary
`earned for Mr. Daniel was $525,000, $525,000 and $175,000 for fiscal 2013, 2012 and 2011, respectively. The
`agreement also provides for salary continuation and severance payme11ts should employment of the
`executive be terminated under specified conditions, as defined therein. Additionally, Mr. Daniel is eligible
`for a11 annual cash bonus based o11 performance. The agreement continues i11 effect until tern1i11ated by
`either the Company or the executive i11 accordance with the termination provisions of the agreement.
`
`The Company has an employment agreement with Judd P. Tir11auer, the Company‘s Executive Vice
`President & Chief Financial Officer. Mr. Timauer was promoted from Senior Vice President & Chief
`Financial Officer to Executive Vice President & Chief Financial Officer effective November 22, 2011.
`Mr. Tirnauer’s employment agreement was amended on August 10, 2011 to increase Mr. Tirnauer’s annual
`base salary from $332,000 to $375,000, effective December 1, 2010. On November 15, 2012, the
`Compensation Committee approved an increase to Mr. Tirnauer’s annual base salary from $375,000 to
`$385,000. effective December 1, 2012. On December 4, 2013. the Compensation Committee approved an
`increase to Mr. Timauer‘s annual base salary from $385,000 to $405,000. Base salary earned for
`Mr. Timauer was $383,000, $375,000 and $368,000 for fiscal 2013, 2012 and 2011, respectively. The
`agreement also provides for salary continuation a11d severance payn1e11ts should employment of the
`executive be terminated under specified conditions, as defined therein. Additionally, Mr. Timauer is
`eligible for an annual cash bonus based on performance. The agreement continues in effect until
`terminated by either the Company or the executive in accordance with the termination provisions of the
`agreement.
`
`1 6.
`
`EXECUTIVE OFFICER EMPLOYMENT AGREEMENTS (Continued)
`
`The Company l1as an employment agreement with Ronald J. Masciantonio, the Company’s Executive
`Vice President & Cl1ief Administrative Officer. Effective April 21, 2011, Mr. Masciantonio was named by
`the Board as an executive officer of the Company. Effective November 22, 2011, Mr. Masciantonio was
`promoted from Senior Vice President & General Counsel to Executive Vice President & General Counsel
`and, effective November 15, 2012, l\/Jr. Masciantonio was promoted to the additional position of Chief
`Administrative Officer and continued to serve as the Company’s General Counsel until August 16, 2013.
`Mr. Masciantonio’s employment agreement was amended on August 10, 2011 to increase
`Mr. Masciantonio’s annual base salary from $275,000 to $320,000, effective December 1, 2010. On
`November 15, 201 2, the Compensation Committee approved an increase to Mr. Masciantonio’s annual
`base salary from $320,000 to S360,000, effective December 1, 2012. On December 4, 2013, the Compensation
`Committee approved an i11crease to Mr. Masciantonio’s annual base salary from $360,000 to $390000. Base
`salary earned for Mr. Mascianto11io was $353,000, $320,000 and $312,000 for fiscal 2013, 2012 and 2011,
`respectively. The agreement also provides for salary continuation and severance payments should
`employment of the executive be terminated under specified conditions, as defined therein. Additionally,
`Mr. Masciantonio is eligible for a11 annual casl1 bonus based on performance. The agreement continues in
`effect until terminated by either the Company or the executive in accordance with the termination
`provisions of the agreement.
`
`Source: Destination Maternity Corp, XBRL, 12/13/2013 | Powered by Intelligize
`
`
`
`DMC Exhibit 2042_132
`
`Target v. DMC
`|PR2013-00530, 531, 532, 533
`
`

`
`Notes to Financial Statements - Postretirement Obligations
`
`Postretirement Obligations
`
`Postretirement Obligations
`
`12 Months Ended
`
`17.
`
`Sep. 30, 2013
`POSTRETIREMENT OBLIGATIONS
`Effective September 30, 2008, Dan W. Matthias, t11e Con1pany"s former C11ai1n1an of t11e Board and
`Former CEO, retired as CEO. In connection with Mr. Matthias’ retirement as CEO, in September 2008 the
`Company entered into a Transition Agreement (the “D. Matthias Transition Agreement”) with
`Mr. Matthias, the term of which expired on September 30, 2012. The D. Matthias Transition Agreement
`provided that Mr. Matthias made himself available to the Company during the term of the agreement for
`strategic planning, corporate development and other matters as requested by the Board or the Company’s
`CEO. Subsequent to his retirement, Mr. Matthias continued to serve the Company as non—executive
`Chairman of the Board until January 2010 and was thereafter available to the Company as stipulated in the
`D. Matthias Transition Agreement. In consideration of Mr. Matthias’ advisory and board services (and in
`lieu of all other director compensation), the Company paid Mr. Matthias an annual retainer of $200,000 a11d
`continued certain insurance and fringe benefits duri11g the term ofthe D. Matthias Transition Agreement.
`The D. Matthias Transition Agreement also provides for the restrictive covenants set forth in
`Mr. Matthias’ employment agreement to continue in effect until September 30,2014.
`
`Effective September 30, 2010, Rebecca C. Matthias, the Company’s former President and Chief
`Creative Officer, retired. In connection with Ms. Matthias‘ scheduled retirement, in November 2009 the
`Company entered into a Transition Agreement (the “R. Matthias Tra11sition Agreement”) with
`Ms. Matthias, the term of which expired on September 30, 2012. In addition to certain preretirement
`employment arrangements, the R. Matthias Transition Agreement provided that Ms. Matthias made herself
`available to the Company during the term of the agreement on a limited basis for strategic planning,
`merchandising, public relations, publicity and other matters as requested by the Company’s CEO. The R.
`Matthias Transition Agreement also provides for the restrictive covenants set forth in Ms. Matthias’
`employment agreement to continue in effect until September 30, 2014.
`
`The Company had Supplemental Executive Retirement Agreements (the “SERP A greement(s)”) with
`Mr. and Ms. Matthias (the “SERP Executives”), which were effective March 2, 2007. Pursuant to the D.
`Matthias Transition Agreement, Mr. Matthias received SERP Agreement benefits totaling $3,960,000.
`which were paid to Mr. Matthias in installments that commenced on April 1, 2009, with the filial installment
`paid on October 1, 2012. The Company paid SERP Agreement benefits to Mr. Matthias totaling $150,000.
`$600,000 and $750,000 i11 fiscal 2013, 2012 and 2011, respectively. Pursuant to the R. Matthias Transition
`Agreement, Ms. Matthias received a lump sum payment of the SERP Agreement benefits of $4,166,000 on
`December 16, 2010. No further amounts are payable to Mr. or Ms. Matthias pursuant to their SERP
`Agreements.
`
`The Co111pa11y accounted for the SERP Agreements i11 accordance with the acco1111ti11g requirements
`for defi11ed benefit pension and other post—retirement plans.
`
`1 7.
`
`POSTRETIREMENT OBLIGATIONS (Continued)
`
`Changes in the benefit obligation under the SERP Agreements as of September 30 were as follows (in
`thousands):
`
`Benefit obligation at beginning of year
`Interest cost
`
`Benefit payments
`Benefit obligation at end of year
`Less: current portion included i11 accrued expenses and other current liabilities
`N011-current benefit obligation at end of year
`
`2013
`
`201-2
`
`$ 150 $ 732
`—
`18
`
`£600)
`(150)
`— 150
`— 1150)
`$ — $ —
`
`Net periodic pension cost o11 a pretax ha sis for fiscal 2012 and 2011 consisted of interest cost of
`$18,000 a11d $88,000, respectively.
`
`The Company had a grantor trust, which was established for the purpose of accumulating assets in
`anticipation of the Company’s payment obligations under the SERP Agreements (the “Grantor Trust”). In
`accordance with the Company’s agreements with the SERP Executives and the trustee for the Grantor
`Trust (the “Trustee”), the Company made partial cash contributions to the Grantor Trust, and provided an
`irrevocable standby letter of credit to the Trustee, in lieu of any contributions otherwise required, as
`security for funding obligations under the SERP Agreements. In December 2010, the Company received a
`distribution of the assets in the Grantor Trust totaling $1,504,000. The amount withdrawn was used to
`partially fund the December 2010 lump sum payment of $4,166,000 of SERP Agreement benefits to
`Ms. Matthias. No further amounts remain in the Grantor Trust.
`
`Source: Destination Maternity Corp, XBRL, 12/13/2013 | Powered by Intelligize
`
`DMC Exhibit 2042_133
`
`Target v. DMC
`|PR2013-00530, 531, 532, 533
`
`

`
`Notes to Financial Statements - Employee Benefit Plans
`
`Employee Benefit Plans
`
`Employee Benefit Plans
`
`12 Months Ended
`Sep. 30, 2013
`
`18.
`
`EMPLOYEE BENEFIT PLANS
`Tl1e Company has a 401(k) savings plan for all employees who elect to participate and who have at
`least six months of service and are at least 18 years of age. Employees ca11 contribute up to 2.0% of their
`annual salary. Employees who meet certain criteria are eligible for a matching contribution from the
`Company based on a sliding scale. Company matches are made in the first quarter of the succeeding
`calcndar year and vcst ovcr a period of approximately six ycars fron1 cach cmployec’s commcnccmcnt of
`employment with the Company. Company matching contributions totaling $121,000 (net of $12,000 of
`cumulative plan forfeitures), $39,000 (net of $100,000 of cumulative plan forfeitures) and $146,000, were
`made in fiscal 2013, 2012 and 20] l, respectively. In addition, the Company may make discretionary
`contributions to the plan, which vest over a period of approximately six years from each employee’s
`commcnccmcnt of cmploymcnt with tho Company. Thc Company has 11ot n1adc any discretionary
`contributions.
`
`Source: Destination Maternity Corp, XBRL, 12/13/2013 | Powered by Intelligize
`
`DMC Exhibit 2042_134
`
`Target v. DMC
`|PR2013-00530, 531, 532, 533
`
`

`
`Notes to Financial Statements - Quarterly Financial Information (Unaudited)
`
`Quarterly Financial
`Information (Unaudited)
`Quarterly Financial Information
`(Unaudited)
`
`12 Months Ended
`sep, 30, 2013
`QUARTERLY FINANCIALINFORMATION (UNAI TDITED)
`Quaiterly financial results for the years ended September 30, 2013 and 2012 were as follows (in
`thousands, except per share amounts):
`
`19.
`
`Fiscal 2013
`
`9/30/13‘
`
`Quarter Ended
`6/30/13
`3/31/13
`
`12/31/12
`
`$ 135,264
`$ 134,859
`$ 141,886
`53 128,250
`Net sales
`71,168
`72,980
`77,288
`69,525
`Gross profit
`3,842
`5,877
`8,591
`5,633
`Net income
`0.29
`0.44
`0.65
`0.42
`Net income per share—Basic
`0.29
`0.44
`0.64
`0.42
`Net income pcr sharc—Dilutcd
`1 9.
`QUARTERLY FINANCIAL INFORMATION (UNAUDITED) (Continued)
`
`Fiscal2012
`
`Net sales
`Gross profit
`Net income
`Net income per sl1are—Basic
`Net income per share—Diluted
`
`9/30/12
`
`$ 128,487
`71,588
`5,189
`0.39
`0.39
`
`Quarter Ended
`6/30/12
`3/31/12
`
`$ 138,847
`75,756
`6,941
`0.53
`0.52
`
`$ 137,792
`73,761
`4,979
`0.38
`0.38
`
`12/31/11
`
`$ 136,350
`69,606
`2,263
`0.17
`0.17
`
`The Company’s business, like that of other retailers, is seasonal. The Company‘s quarterly net sales
`have historically bccn highest in its third fiscal quarter, corresponding to thc pcak Spring sclling scason.
`Given the historically higher sales level in its third fiscal quarter and the relatively fixed nature of most of
`the Company’s operating expenses, the Company has typically generated a Very significant percentage of
`its full year operating income and net income during its third fiscal quarter.
`
`Source: Destination Maternity Corp, XBRL, 12/13/2013 | Powered by Intelligize
`
`
`
`DMC Exhibit 2042_135
`
`Target v. DMC
`|PR2013-00530, 531, 532, 533
`
`

`
`Notes to Financial Statements - Segment and Enterprise Wide Disclosures
`
`Segment and Enterprise
`Wide Disclosures
`Segment and Enterprise Wide
`
`D'sc|°sures
`
`12 Months Ended
`sep, 30, 2013
`
`20.
`
`SEGMENT AND ENTERPRISE WIDE DISCLOSURES
`Operating Segment. For purposes of the disclosure requirements for segments of a business
`enterprise, the Company has determined that its business is comprised of one operating segment: the
`design, manufacture and sale of maternity apparel a11d related accessories. While the Company offers a
`wide ra11ge of products for sale, the substantial portion of its products are initially distributed through the
`same distribution facilities, many of the Company’s products are manufactured at common contract
`manufacturer production facilities, the Company’s products are marketed through a common marketing
`department, and these products are sold to a similar customer base, consisting of expectant mothers.
`
`Geographic Information. Geographic revenue information is allocated based on the country in
`which the products or services are sold a11d, in the case of international franchise revenues, on the
`location of the customer. Information concerning the Company’s operations by geographic area is as
`follows (in thousands):
`
`Year Ended September 30,
`J J L
`
`Net Sales to Unafffliated Customers
`United States
`Foreign
`
`$ 512,585
`27,674
`
`$ 514,779
`26,697
`
`$ 520,023
`25,371
`
`September 30, September 30,
`L L
`
`Long-Lived Assets, Net
`United States
`Foreign
`
`35
`
`$
`
`53,992
`1,799
`
`51,449
`976
`
`Major Customers. For the periods presented, the Company did not have any one customer who
`represented more than 10% ofits net sales.
`
`Source: Destination Maternity Corp, XBRL, 12/13/2013 | Powered by Intelligize
`
`DMC Exhibit 2042_136
`
`Target v. DMC
`|PR2013-00530, 531, 532, 533
`
`

`
`Notes to Financial Statements - Interest Expense, Net
`
`Interest Expense, Net
`
`.
`
`IN I FREST EXPENSE NET
`Interest expense, net for the years ended September 30 is comprised of the following (in thousands):
`
`:15L2e1;5 2;2-:93:
`
`1nf't<“e.£$,st@2§p,an.s.i:
`Tnterest income
`1ia”r<%me.st~ex;p:e;;sc,
`
`$1 $ 51,255 vs:2;:2s6
`(25)
`£41)
`‘$”;5’:32
`
`)_
`
`Source: Destination Maternity Corp, XBRL, 12/13/2013 | Powered by Intelligize
`
`DMC Exhibit 2042_137
`
`Target v. DMC
`|PR2013-00530, 531, 532, 533
`
`

`
`Notes to Financial Statements - Related Party Transactions
`
`Related Party Transactions
`
`22.
`
`family relationships among any of the Company’s current executive officers or directors.
`
`RELATED PARTY TRANSACTIONS
`There is a husband and wife relationship betweeil Mr. Mafihias and Ms. Matthias. There are no
`
`Source: Destination Maternity Corp, XBRL, 12/13/2013 | Powered by Intelligize
`
`DMC Exhibit 2042_138
`
`Target v. DMC
`|PR2013-00530, 531, 532, 533
`
`

`
`Notes to Financial Statements - Schedule of Valuation and Qualifying Accounts
`
`Schedule of Valuation and
`
`DESTINATION MATERNITY’ CORPORATION AND sUDsmIARms
`
`Q”a"fY'”9 “C0” “ts
`
`SCHEDULE II—VALUATION AND QUALIFYING AC‘CO[NTS
`(in thousands)
`
`$1,160, $919 and $853, respectively.
`
`Year ,EI,1d,.c.d gsepiiembger 30, '20L13~
`Product rcturn rcscrvc
`
`$
`
`Y:e9I_E£i’dBd S'3PV5fIHb€T 30,, 201,?"
`Product return reserve
`
`3:‘
`
`‘res: Ended September 30,,2o‘1.1
`Product return reserve’
`
`3:‘
`
`2,225
`
`2,083
`
`1,469
`
`35
`
`$
`
`$
`
`477
`
`142
`
`614
`
`‘
`
`'
`
`$
`
`~ 55
`
`2,702
`
`— $
`
`2,225
`
`— $
`
`2,083
`
`(1)
`
`As of September 30, 2013, 2012 and 2011, the Company’s product return reserve reflects the
`estimated gross sales value of estimated product returns, which had an estimated cost value of
`
`Source: Destination Maternity Corp, XBRL, 12/13/2013 | Powered by Intelligize
`
`DMC Exhibit 2042_139
`
`Target v. DMC
`|PR2013-00530, 531, 532, 533
`
`

`
`Accounting Policies - Summary of Significant Accounting Policies (Policies)
`
`Summary of Significant
`Accounting Policies
`(Policies)
`Principles of Consolidation and
`Basis of Financial Statement
`Presentation
`
`12 Months Ended
`
`Sep. 30, 2013
`
`a.
`
`Principles of Consolidation and Basis of Financial Statement Presentation
`
`The accompanying consolidated financial statements include the accounts of the Company a11d its
`direct and indirect wholly-owned subsidiaries: Cave Springs, Inc., Mothers Work Canada, Inc., Destination
`Maternity Apparel Private Limited and Mothers Work Services, Inc. All significant intercompany
`transactions and accounts have heerr eliminated ir1 consolidation.
`
`Fiscal Year-End
`
`b.
`
`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 on September 30 in those years. For example, the
`Company’s “fiscal 2013” ended on September 30, 2013.
`
`Use of Estimates
`
`c.
`
`Use ofEstimates
`
`The preparation of financial statements in conformity with accounting principles generally accepted
`in the United States requires management 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.
`
`Cash and Cash Equivalents
`
`cl.
`
`Cash and Cash Equivalents
`
`Cash and cash equivalents include cash 011 hand, cash in the bank and short—term investments with
`an original maturity of three months or less when purchased. Rook cash overdrafts, which are outstanding
`checks in excess of funds on deposit, of $4,730,000 and $3,452,000 were included in accounts payable as of
`September 30, 2013 and 2012, respectively.
`
`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 011 its cash accounts.
`
`Inventories
`
`e.
`
`Inventories
`
`Inventories are valued at the lower of cost or market. Cost is determined by the “f1rst—in, first—out”
`(FIFO) method. Inventories of goods manufactured by the Company include the cost ofmaterials, freight,
`direct labor, and manufacturing and distribution overhead.
`
`Property, Plant and Equipment
`
`f
`
`Property, 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 lives 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 the lease term or their usefiil life. The cost ofassets 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 maj or renewals and betterrnents 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 pl ans 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 loss is recognized to reduce the carrying value of the asset. The amount of the
`impairment loss is determined by comparing the fair value of the asset with the carrying value. During
`fiscal 2013, 2012 and 2011, the Company recorded impairment write—downs of property, plant and
`equipment totaling $754,000, $1,875,000 and $759,000, respectively, on a pretax basis.
`
`Intangible Assets
`
`2.
`
`SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
`
`g.
`
`Intangible Assets
`
`Intangible assets with definite useful lives consist primarily of patent and lease acquisition costs.
`The Company capitalizes legal costs incurred to defend its patents when a successful outcome is deemed
`probable and to the extent of an evident increase in the value of the patents. Intangible assets are
`amortized over the shorter of their useful life or, if applicable, the lease term. Ma11ager11er1t reviews the
`carrying amount of these intangible assets as impairment indicators arise, to assess the continued
`recoverability based 011 future undiscounted cash flows and operating results from the related asset, future
`asset utilization and changes in market conditions. During fiscal 2013 the Company capitalized $1,093,000
`of legal costs incurred in connection with a lawsuit asserting infringement of Company patents. During
`fiscal 2013, 2012 and 2011, the Company recorded write—downs ofintangible assets totaling $32,000, $1,000
`Source: Destination Maternity Corp, XBRL, 12/13/2013 | Powered by Intelligize
`
`
`
`DMC Exhibit 2042_140
`
`Target v. DMC
`|PR2013-00530, 531, 532, 533
`
`

`
`and $9,000, respectively, on a pretax basis. The Company has not identified any indefinite—lived intangible
`assets. Aggregate amortization expense ofintangible assets in fiscal 2013, 2012 and 201 1 was $149,000,
`$142,000 and $135,000, respectively.
`
`Estimated amortization expense of the Company’s intangible assets as of September 30, 2013, for the
`next five fiscal years, is as follows (in thousands):
`
`Fiscal Year
`2014
`2015
`2016
`2017
`2018
`
`$ 198
`1 80
`175
`168
`163
`
`Interest Rate Derivatives
`
`h.
`
`Interest Rate Derivatives
`
`The Company mitigated a portion of its floating rate interest risk on variable rate lo11g-term debt
`through an interest rate swap agreement that expired on April 18, 2012. On the date the derivative
`inst111ment 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”) and recognized the derivative
`on the balance sheet at fair value. In accordance with applicable accounting standards for derivative
`instruments, changes in the fair value of a derivative that is designated as, and meets all the criteria for, a
`cash flow hedge were recorded in accumulated other comprehensive loss and reclassified into earnings as
`the underlying hedged item affected earnings. The Company formally documented the relationship
`between the hedging instrument a11d hedged items. The Company formally assessed at the inception of the
`hedge and on a quarterly basis, whether the derivative was highly effective in offsetting changes in cash
`flows of the hedged item. For fiscal 2012 and 2011, the Company's interest rate swap was determined to
`have no ineffectiveness.
`
`Deferred Financing Costs
`
`i.
`
`Deferred Finaneing Casts
`
`Deferred financing costs are amortized to interest expense over the term of the related debt
`agreement. Amortization expense of deferred financing costs in fiscal 2013, 2012 and 2011 was $203,000,
`$105,000 and $170,000, respectively. In connection with debt extinguishments, in fiscal 2013, 2012 and 2011
`the Company wrote off $9,000, $22,000 a11d $37,000, respectively, of u11an1ortized deferred financing costs
`(see Note 9). In connection with its current credit facility entered i11to on November 1, 2012, the Company
`incurred approximately $988000 in deferred financing costs, of which $927,000 was paid in fiscal 2013 a11d
`$61,000 was paid i11 fiscal 2012 (see Note 8).
`
`Estimated amortization expense of the Company’s deferred financing costs as of September 30, 2013
`is as follows (in thousands):
`
`Fis ca I Yeat
`20 14
`201 5
`2016
`2017
`20 18
`
`$ 198
`1 98
`198
`198
`1 5
`
`Deferred Rent
`
`2.
`
`SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
`
`j.
`
`Deferred Rent
`
`Rent expense on operating leases, including rent holidays and scheduled re11t increases, is recorded
`on a straight-line basis over the term of the lease commencing on the date the Company takes possession
`ofthe 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 a deferred rent liability i11 the
`accompanying Consolidated Balance Sheets. Tenant improvement allowances received from landlords are
`also included in tl1e accompanying Consolidated Balance Sheets as deferred rent liabilities and are
`amortized as a reduction of rent expense over tl1e term of the lease from the possession date.
`
`Treasury (Reacquired) Shares
`
`k.
`
`Treasmjv (Reacquired) Sh ares
`
`Fair Value of Financial
`Instruments
`
`Sl1ares repurehased are retired and treated as authorized but unissued shares, with the cost i11 excess
`of par value of the reaequired shares charged to additional paid-in capital and the par value charged to
`common stock.
`
`L
`
`Fair Value 0fFinancial Instruments
`
`The carrying values of cash and cash equivalents, trade receivables and accounts payable
`
`Source: Destination Maternity Corp, XBRL, 12/13/2013 | Powered by Intelligize
`
`
`
`DMC Exhibit 2042_141
`
`Target v. DMC
`lPR2013-00530, 531, 532, 533
`
`

`
`approximate fair value due to the short—term nature of those instruments. The Inaj ority of the Company’s
`long-tenn debt bore interest at variable rates, which adjusted based on market conditions, and the carrying
`value of the long-term debt approximated fair value. The fair value of the Company‘s debt was determined
`using a discounted cash flow analysis based on interest rates available to the Company. A significant
`portion of the Company’s floating rate interest risk on variable rate long-term debt was mitigated through
`an interest rate swap agreement that expired on April 18, 2012.
`
`Revenue Recognition, Sales
`Returns and A||owances
`
`in
`
`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 delivered to customers for licensed brand product and Internet sales, and when
`merchandise is shipped to international franchisees. A liability is established for the retail value of gift
`cards sold and merchandise credits issued. The liability is relieved and revenue is recognized when gift
`cards or merchandise credits are redeemed by customers as tender for merchandise purchased. 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.
`
`Other Revenues
`
`it.
`
`Other Revenues
`
`Included iI1 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. Revenue from marketing partnership
`programs is recognized when goods or services are provided. Also included in net sales are fees and
`royalties related to international franchise agreements. International franchise fees are earned by the
`Company when all material services or conditions related to the international franchise agreement have
`been substantially performed or satisfied a11d royalties are earned based on net sales of the Company’s
`international franchisees and may include minimum guaranteed royalties.
`
`Cost of Goods Sold
`
`o.
`
`Cost of Goods Sold
`
`Cost of goods sold in the accompanying Consolidated Statements oflncome includes: merchandise
`costs (including customs duty expenses), expenses related to inventory shrinkage, product-related
`corporate expenses (including expenses related to payroll, benefit costs and operating expenses of the
`Companyis 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.
`
`Shipping and Handling Fees and
`Costs
`
`p.
`
`Shipping and Handling Fees and Costs
`
`Selling, General and
`Administrative Expenses
`
`The Company includes shipping and handling revenue earned from its Internet activities in net sales.
`Shipping and handling costs, which are included in cost of goods sold in the accompanying Consolidated
`Statements oflncoine, include shipping supplies, related labor costs and third-party shipping costs.
`
`2.
`
`SUMMARY or SIGNIFICANT ACCOUNTING POLICIES (Contillued)
`Selling, General andAdministrative Expenses
`q.
`Selling, general and administrative expenses in the accompanying Consolidated Statements of
`Income iI1cl11de advertising and marketing expenses, corporate administrative expenses, store expenses
`(including store payroll and store occupancy expenses), and store opening expenses.
`
`Advertising Costs
`
`r.
`
`Advertising Costs
`
`The Company expenses the costs of advertising when the advertising first occurs. Advertising
`expenses, including Internet advertising expenses, were $16,984,000, $13,878,000 and $11,712,000 i11 fiscal
`2013, 2012 and 2011, respectively.
`
`Stock—based Compensation
`
`s
`
`Stock-based Compensation
`
`Store Closing, Asset Impairment
`and Asset Disposal Expenses
`
`The Company recognizes employee stock-based compensation as a cost iii the accompanying
`Consolidated Statements of Income. Stock—based awards are measured at the grant date fair value and are
`recorded generally oI1 a straight-line ha