`catalog and website orders.
`
`The terms ofour debt instruments imposefinancial and operating restrictions.
`
`Our credit facility and tl1c indenture governing the senior notes both contain restrictive covenants that limit our ability to engage in activities
`that may be in our long term best interests. These covenants limit or restrict, among other things, our ability to:
`0 inc11r additional indebtedness;
`
`opay dividends or make other distributions in respect of our equity securities, or purchase or redeem capital stock, or Inake certain
`investments;
`
`ohave our subsidiaries pay dividends, make loans or transfer assets to us;
`
`osell assets, i11cluding the capital stock of our subsidiaries;
`
`center into any transactions with our affiliates;
`
`otransfer any capital stock of any subsidiary or permit any sub sidiary to issue capital stock;
`ocreate liens;
`
`center into certain sale/leasehack transactions‘, and
`
`Ieffect a consolidation or merger or transfer of all or substantially all of our assets.
`
`These li111itatio11s and restrictions may adversely affect our ability to finance our future operations or Capital needs or engage i11 other
`business activities that may be in our best interests. In addition, our ability to borrow under the credit facility is subject to borrowing base
`requirements. If we breach any of the covenants in our credit facility or our indenture, we may be in default under our credit facility or our
`indenture. If we default, the holders of the senior notes or the lender under our credit facility could declare all borrowings owed to them, including
`accrued interest and other fees, to be due and payable.
`
`Our sh are price may be volatile and could decline substantially.
`
`The market price of our common stock has been. and is expected to continue to be, volatile, both because of actual and perceived changes in
`our financial results and prospects and because of general volatility in the stock market. The factors that could cause fluctuations in our share
`price may include, among other factors discussed in this section, the following:
`
`oactual or anticipated variations i11 the financial results and prospects of our business or other companies i11 the retail business;
`
`ochanges in financial estimates by Wall Street research analysts;
`
`oactual or anticipated changes in the U.S. economy or the retailing environment;
`
`ochanges in the market valuations of other specialty apparel or retail companies;
`
`oannouncements by our competitors or us;
`
`oadditions and departures ofkey personnel;
`
`ochanges in accounting principles;
`
`othe passage oflegislation or other developments affecting us or our industry;
`
`othe trading volume of our common stock i11 the public market;
`
`Source: DESTINATION MATERNITY CORP., 10-K, 12/14/2006 I Powered by Intelligize
`
`DMC Exhibit 2038_023
`
`Target v. DMC
`|PR2013-00530, 531, 532, 533
`
`
`
`ochanges in economic conditions;
`ofinancial market conditions;
`
`onatural disasters, terrorist acts, acts of war or periods of civil unrest;
`othe realization of some or all of the risks described in this section entitled “Risk Factors”; and
`
`oany goodwill impairment would require a write down that would likely negatively affect our stock price.
`In addition, the stock markets have experienced significant price and trading volume fluctuations from time to time, and the market prices of
`the equity securities of retailers have been extremely volatile and have recently experienced sharp price and trading volume changes. These broad
`markct fluctuations may adversely affect the market price of our common stock.
`
`Our charter documents contain certain anti-takeover provisions, and we are entitled to certain oth er protective provisions under Delaware
`law.
`
`We are a Delaware corporation and the anti-takeover provisions of Delaware law impose various impediments to the ability of a third party to
`acquire control of the Company, even if a change of control would be beneficial to our existing stockholders. We also l1ave adopted a stockholder
`rights plan, commonly known as a “poison pill,” that entitles our stockholders to acquire additional shares of us, or a potential acquirer of us, at a
`substantial discount to their market value in the event of an attempted takeover. In addition, our amended and restated certificate of incorporation
`and by-laws contain provisions that may discourage, delay or prevent a merger or acquisition involving us that our stockholders may consider
`favorable by, among other things:
`
`oauthorizing the issuance of preferred stock, the terms of which maybe determined at the discretion of o11r board of directors;
`
`orestricting the ability of stockholders to call special meetings of stocklloltlers;
`
`oproviding for a classified board of directors, with staggered three-year terms; and
`
`-establishing advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted on
`by stockholders at meetings.
`These provisions may also reduce the market value of our common stock.
`
`We do not expect to pay cash rlividemls in theforeseeablefuture.
`
`We have 11ot paid any cash dividends on our common stock since our initial public offering and do not anticipate paying cash dividends on
`our common stock in the foreseeable future. In addition, the terms of our senior notes and our credit facility significantly restrict our ability to
`declare or pay dividends on our common stock. Even if our ability to pay dividends was not restricted under the terms of the indenture governing
`our scnior notcs or our crcdit facility, any future paymcnt ofdividcnds would still bc at thc discretion of our board of directors and would bc bascd
`upon any applicable restrictive financial covenants, earnings, capital requirements and our financial condition, among other factors, at the time any
`such dividend is considered.
`
`Any increase in our sales and marketing efforts that target markets outside the U. S. would expose us to additional risks associated with
`international operations.
`
`We believe that in the future, an opportunity for sales growth may come from the development of international sales. We may not be
`successfiil in these efforts. and other than our existing operations in
`
`24
`
`Source: DESTINATION MATERNITY CORP., 10-K, 12/14/2006 I Powered by Intelligize
`
`DMC Exhibit 2038_O24
`
`Target v. DMC
`|PR2013-00530, 531, 532, 533
`
`
`
`Canada, we presently have no commitment, agreement or plans relating to any product distribution or the development of selling operations
`outside of\Iorth America. International operations and sales subject us to risks and challenges that We would otherwise not face if we conducted
`our business only in the U.S. For example, we may depend o11 third parties to market our products through foreign sales channels, and we may be
`challenged by laws and business practices favoring local competitors. In addition, our ability to succeed in foreign markets will depend on our
`ability to protect our intellectual property. We must also adopt our pricing structure to address different pricing environments and may face
`difficulty in enforcing revenue collection internationally. To the extent we achieve significant sales outside of the U.S. in the future, we may have
`significant exposure to fluctuating foreign currency exchange rates.
`
`We could havefailures in our system of internal controls.
`
`We maintain a documented system of internal controls which is reviewed and monitored by management, who meet regularly with our audit
`committee of the board of directors. We believe we have a well-designed system to maintain adequate internal controls on the business. We
`ca1111ot assure you that there will 11ot be any co11trol deficiencies in the filture. Should we become aware of any control deficiencies, we would
`report them to the audit committee and recommend prompt remediation. We have devoted significant resources to document, test, monitor and
`improve our internal controls and will continue to do so; however, we cannot be certain that these measures will ensure that our controls are
`adequate iii the future or that adequate controls will be effective in preventing fraud. If we fail to maintain an effective system of internal controls,
`we may not be able to accurately report our financial results or prevent fraud. Any failures in the effectiveness of our internal controls could have
`a material adverse effect o11 our financial condition or operating results or cause us to fail to meet reporting obligations.
`
`Item 1B. Unresolved Staff Comments
`
`Not applicable.
`
`Item 2. Properties
`
`We own our principal executive offices and distribution facility, which is located at 456 North Fifth Street, Philadelphia, Pennsylvania, subject
`to a mortgage under the terms of which we owe approximately $2.8 million as of September 30, 2006. This facility consists of approximately 318,000
`square feet, of which approximately 45,000 square feet is dedicated to office space and the remaining square footage is used for finished goods
`warehousing and distribution. 011 August 26, 2002, we entered into a ten-year lease for a facility located at 2001 Kitty Hawk Avenue, Philadelphia,
`Pennsylvania in the Philadelphia Naval Business Center. The area leased at this facility, which we use for raw material cutting, warehousing and
`distribution, consists of approximately 64,000 square feet of space. To facilitate our store growth in Canada, we entered i11to a three-yea.r lease
`commencing November 1, 2002 for approximately 12,000 square feet of finished goods warehouse and distribution space in Mississauga, Ontario in
`Canada. We renewed the lease in Canada through October 31, 2007. We believe that these facilities will be adequate to support our anticipated
`distribution needs for the near term and, potentially, lo11ger. In the event we need additional space to meet our future distribution needs, we believe
`that such space would be readily available. Our facilities are subject to state and local regulations that range from building codes to health and
`safetv.
`
`We lease our store premises for terms averaging from seven to ten years. Certain leases allow us to terminate or reduce o11r obligations at
`specified points in time in the event that the applicable store does not achieve a specified sales volume. Some of our store leases also provide for
`contingent payments based on sales volume, escalations of the base rent, as well as increases in operating costs, marketing costs and real estate
`taxes.
`
`Source: DESTINATION MATERNITY CORP., 10-K, 12/14/2006 I Powered by Intelligize
`
`DMC Exhibit 2038_O25
`
`Target v. DMC
`|PR2013-00530, 531, 532, 533
`
`
`
`As ofSepte1nber 30, 2006, the following number of store leases are set to expire as listed in the table below. We do not expect the expiration of
`any leases to have a material adverse impact on our business or operations.
`
`Fiscal Year Lenses
`Expire
`
`2007
`2008
`2009
`2010
`2011
`2012 and later
`Total
`
`Number
`of
`Stores
`88
`l00
`l2l
`H0
`69
`322
`810
`
`In addition to the stores we operate, we have arrangements with department and specialty stores, including Babies ”R” Us, Bloomingdale‘s,
`Macy’s and Sears, to operate maternity departments in their stores. These leased departments typically involve the lease partner collecting all of
`the revenue from the leased department. The revenue is remitted to us, less a fixed percentage of the volume earned by the lease partner as
`stipulated in the agreement. We provide at least some amount of staffing for each of the leased departments, with the amount varying depending
`on the specific airarlgenlent.
`
`Item 3. Legal Proceedings
`
`On January 12, 2005, a purported class action was filed against us in the U.S. District Court for the District of Connecticut. The complaint
`alleged that. u11dcr applicable federal and state law, ccrtain former and current employees should have received ovcrtimc compensation. The
`plaintiffs in this case sought unspecified actual damages, penalties and attorneys’ fees. We understand that similar proceedings have been
`brought against otl1er retail companies. In July 2006, the parties settled the outstanding claims and entered into a confidential settlement
`agreement, and on August 1, 2006, the District Court approved the settlement and dismissed the case. The terms of the settlement did not and will
`not have a material adverse effect on our results of operation or financial position.
`In addition, from time to time, we are named as a defendant in legal actions arising from our 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,
`we do not believe that the resolution of any pending action will have a material adverse effect on our financial position, results of operations or
`liquidity.
`
`Item 4. Submission of Matters to a Vote of Security Holders
`
`Not applicable.
`
`Source: DESTINATION MAT'ERNITY CORR,
`
`lO~K, 1.?/'14/2086 | Powered by Intelligize
`
`DMC Exhibit 2038_O26
`
`Target v. DMC
`|PR2013-00530, 531, 532, 533
`
`
`
`Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
`
`Our common stock is traded on the ,\1asdaq Global Market under the symbol “MWRK.” The following table sets forth for the periods
`indicated below the reported high and low sales prices of our common stock as reported on the ,\1asdaq Global Market:
`
`PART II.
`
`Fiscal Year Ended September 30, 2005:
`Quarter ended December 31, 2004
`Quaiter ended March 31, 2005
`Quarter ended June 30, 2005
`Quarter ended September 30, 2005
`Fiscal Year Ended September 30, 2006:
`Quarter ended December 31, 2005
`Quarter ended March 31, 2006
`Quarter ended June 30, 2006
`Quarter ended September 30, 2006
`
`High
`
`Low
`
`$ 1866
`15.59
`15.00
`13.66
`
`$ 13.19
`26.21
`35.20
`50.83
`
`T19
`
`119
`
`1 1.75
`12.43
`11.58
`10.00
`
`6.72
`12.79
`20.12
`30.26
`
`As of December 4, 2006, there were 917 holders of record and 2,695 estimated beneficial holders of our common stock.
`
`We have not paid any cash dividends on our con1mon stock since our initial public offering and do not anticipate paying cash dividends on
`our common stock in the foreseeable future. In addition, the terms of our 11'/4% senior notes due 2010 (the “Senior Notes”) and our credit facility
`significantly restrict our ability to dec1 are or pay dividends on our common stock. Even ifwe were not restricted under the terms of our Senior
`Notes or our credit facility from being able to pay dividends, any future payment of dividends would still be at the discretion ofour Board of
`Directors and would be based upon certain restrictive financial covenants, earnings, capital requirements a11d our financial condition, among other
`factors, at the time any such dividend is considered.
`Up to a total of 1,975,000 options may be issued under our 1987 Stock Option Plan. Under our 2005 Equity Incentive Plan (the “2005 Plan”),
`awards may be granted in the form of options, stock appreciation rights, restricted stock or restricted stock units. Up to 500,000 shares of our
`common stock may be issued in respect of awards under our 2005 Plan, with no more than 250.000 ofthose shares permitted to be issued in respect
`of restricted stock or restiioted stock units granted under the 2005 Plan.
`
`Source: DESTINATION MAT'ERNITY CORR,
`
`‘lO~K, 1.?/'14/2086 | Powered by Intelligize
`
`DMC Exhibit 2038_O27
`
`Target v. DMC
`|PR2013-00530, 531, 532, 533
`
`
`
`Item 6. Selected Consolidated Financial and Operating Data
`
`The following tables set forth selected data pertaining to the consolidated statement of operations, operating, cash flow and other, and
`balance sheet as of and for the periods indicated. The selected consolidated statement of operations and balance sheet data for each of the five
`fiscal years presented below are derived from our consolidated financial statements. You should read this information in conjunction with
`‘‘Management’s Discussion and Analysis of Financial Condition a11d Results of Operations” a11d our consolidated financial statements a11d the
`related notes included elsewhere in this report.
`
`Statement of Operations Data:
`Net sales
`Cost of goods sold (2)
`Gross profit
`Selling, general and administrative expenses (2)
`Operating income
`Interest expense, net (2)
`Loss on exlinguishmenl ofdebl (1)(2)
`Income (loss) before income taxes
`Income tax provision (benefit)
`Net income (loss)
`Dividends on preferred stock (1)
`Net income (loss) available to common
`st0(;kh01ders
`
`Net income (loss) per share—Basic
`Average shares outstanding—Basic
`
`Net income (loss) per share—Di1uted
`Average shares ontstanding—Diluted
`
`2006
`
`Year Ended September 30,
`2005
`2004
`2003
`(in thousands, except per share amounts)
`
`$ 602,744
`288,082
`314,662
`284,334
`30,328
`14,534
`873
`14,921
`5,819
`9,102
`—
`
`$
`
`$
`
`‘,5
`
`9,102
`
`1_70
`5,348
`
`L63
`5,591
`
`S 561,627
`277,453
`284,174
`269,936
`14,238
`15,293
`—
`(1,055 )
`(880 )
`(175 )
`—
`
`$ 518,051
`242,751
`275,300
`252,030
`23.270
`14,765
`—
`8,505
`3,466
`5,039
`—
`
`S
`
`S
`
`S
`
`(175 ) $
`
`(0_03 ) $
`5,242
`
`(0_03 ) $
`5,242
`
`5,039
`
`0_97
`5,212
`
`092
`5,501
`
`$ 492,447
`227.961
`264,486
`228,466
`36.020
`14,469
`—
`21,551
`8,337
`13,214
`—
`
`$
`
`$
`
`$
`
`13,214
`
`2_52
`5,236
`
`234
`5,646
`
`2002 (1)
`
`$ 453.159
`214,659
`238,500
`205,355
`33,145
`13,961
`2515
`16,669
`6.269
`10,400
`3,942
`
`$
`
`$
`
`$
`
`6,458
`
`1_65
`3,914
`
`1_52
`4,261
`
`(1)In August 2002, as part of a refinancing, we repurchased our existing 125/8% senior notes and Series A and Series C Preferred Stock and, in
`connection therewith, incurred $3.0 million of after—tax one—time charges, including approximately $2.6 million of non—cash charges.
`(2)Fiscal 2002 has been reclassified from amounts previously reported to conform to the current year presentation.
`
`Source: DESTINATION MATERNITY CORR,
`
`‘lO~K, 12/'14/2086 | Powered by Intelligize
`
`DMC Exhibit 2038_O28
`
`Target v. DMC
`|PR2013-00530, 531, 532, 533
`
`
`
`Operating Data:
`Comparable store sales increase (decrease) ( 1)
`Average net sales per gross square foot (2)
`
`Average net sales per store (2)
`Gross store sq11are footage at period
`end (3)
`Gross retail location square footage at period
`end (4)
`Number of retail locations at period end:
`Motherhood X/Iaternity stores
`Mimi Maternity stores
`A Pea in the Pod stores
`Destination Maternity superstores
`Total stores
`Leas ed departments
`Total retail locations
`Other Financial Data:
`Adjusted EBITDA (5)
`Ratio of total debt to Adjusted EBITDA
`Ratio of Adjusted EBITDA to interest expense
`Cash flows provided by operating activities
`Cash flows used in investing activities
`Cash flows used in financing activities
`Capital expenditures
`Balance Sheet Data (at end of period):
`working capital
`Total assets
`Total debt
`Stockholders’ equity
`
`Year Ended September 30,
`2002
`2003
`2005
`2004
`2006
`(unaudited; in thousands, except operating data and ratios)
`
`4.3 %
`
`(2.5 )‘‘/o
`
`(4.9 )%
`
`0.3 "/u
`
`2.2 "/6
`
`$
`$
`
`305
`570,000
`
`$
`$
`
`295
`534,000
`
`$
`$
`
`311
`537,000
`
`$
`$
`
`345
`572,000
`
`$
`$
`
`362
`589.000
`
`1,532,000
`
`1,579,000
`
`1,569,000
`
`1,451,000
`
`1,231,000
`
`1.819.000
`
`1.874.000
`
`1.693.000
`
`1,541.000
`
`1.313.000
`
`659
`106
`33
`12
`810
`731
`1.541
`
`690
`117
`37
`8
`852
`73 9
`1,591
`
`717
`121
`41
`4
`883
`23 2
`1,115
`
`688
`119
`44
`—
`851
`15 5
`1,006
`
`616
`104
`43
`—
`763
`146
`909
`
`$
`
`:8
`
`$
`
`:8
`
`51,715
`2.3x
`3.6x
`42,41 3
`(23,166 )
`(3,380 )
`13,933
`
`83,772
`287,736
`118,349
`80,700
`
`$
`
`$
`
`33,906
`3.8x
`2.2x
`7,324
`(11,414 )
`(1,340 )
`17,644
`
`71,228
`273,317
`128,856
`63,328
`
`$
`
`$
`
`40,579
`3.2x
`2.7x
`1 8,256
`(23,020 )
`(2,500 )
`21.540
`
`67,833
`271,370
`127,917
`62.903
`
`$
`
`$
`
`50,213
`2.6x
`3.5x
`36,139
`(22,169 )
`(4,648 )
`25,344
`
`62,708
`263,536
`128,047
`58,858
`
`45,422
`2.8x
`3.3x
`31 ,056
`(20,219 )
`(14,786 )
`12.242
`
`55,214
`247,139
`128,282
`45.708
`
`(1) Comparable store sales figures represent sales at retail locations that have been in operation by 1VIothers Work for at least twelve full months at the beginning
`of the period for which such data is presented. As used in this Form 10-K, “retail locations" include stores and leased departments, and exclude locations
`where Kohfs sells our products under an exclusive product and license agreement.
`
`(2) Based on stores in operation by Mothers Work during the entire twelve-month period (which does not include leased department or licensed relationships).
`(3) Based on stores in operation by Mothers Work at the end of the period.
`
`(4) Based on all retail locations in operation at the end of the period.
`(5) Adjusted EBITDA represents operating income before deduction for the following non-cash charges: (i) depreciation and amortization expense; (ii) loss on
`impairment of long-lived assets; (iii) (gain) loss on disposal of assets; and (iv) stock-based compensation expense. We have presented Adjusted EBITDA to
`enhance your understanding of our operating results. Adjusted EBITDA is provided because management believes it is an important measure of financial
`performance used in the retail industry to measure operating results, to determine the value of companies within the industry and to define standards for
`borrowing from institutional lenders. We use Adjusted EBITDA as a measure of the performance of the Company. We provide Adjusted EBITDA to
`investors to assist them in performing their analysis of o11r historical operating results. Adjusted EBITDA reflects a measure of o11r operating results before
`consideration of certain non-cash charges and consequently, you should not construe Adjusted EBITDA as an alternative to net income (loss) or operating
`income as an indicator of our
`
`Source: DESTINATION MAT'ERNITY CORR,
`
`‘tO~K, 12/'14-/2006 | Powered by Intelligize
`
`DMC Exhibit 2038_O29
`
`Target v. DMC
`|PR2013-00530, 531, 532, 533
`
`
`
`operating performance, or as an alternative to cash flows from operating activities as a measure of our liquidity, as determined in accordance with generally
`accepted accounting principles. We may calculate Adjusted EBITDA differently than other companies. Presented below is a reconciliation of net income
`(loss) and operating income (the most directly comparable financial measures calculated and presented in accordance with GAAP) to Adjusted FBITTD/-\.
`
`Reconciliation of Net Income (Loss) to Adjusted EBITDA
`(in thousands)
`(unaudited)
`
`Net income (loss)
`Add: income tax provision (benefit)
`Add: interest expense, net
`Add: loss on extinguishment of debt
`Operating incomc
`Add: depreciation and amortization expense
`Add: loss on impairment oflong-lived assets
`Add: (gain) loss on disposal of assets
`Add: stock—based compensation expense
`Adjusted EBITDA
`
`$
`
`2006
`9,102
`5,819
`14,534
`873
`30,328
`16,118
`2,612
`(139 )
`2,796
`$ 51,715
`
`$
`
`Year Ended September 30,
`2005
`2004
`2003
`(175 ) $
`5,039
`$ 13,214
`(880 )
`3,466
`8,337
`15,293
`14,765
`14,469
`—
`—
`—
`14,238
`23,270
`36,020
`15,502
`14,270
`12,930
`3,440
`1,816
`616
`726
`1,223
`647
`
`2002
`$ 10,400
`6,269
`13,961
`2,515
`33,145
`11,789
`303
`185
`
`$ 33,906
`
`$ 40,579
`
`$ 50,213
`
`$ 45,422
`
`30
`
`Source: DESTINATION MATERNITY CORR, 10-K, 12/'14/2006 | Powered by Intelligize
`
`DMC Exhibit 2038_O30
`
`Target v. DMC
`|PR2013-00530, 531, 532, 533
`
`
`
`Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
`Overview
`
`The following discussion should be read in conjunction with thc consolidated financial statcmcnts and their related notes includcd clscwhcrc
`in this report.
`
`We are the leading designer and retailer ofmaternity apparel in the United States with 1,541 retail locations, including 810 stores in all 50
`states, Puerto Rico and Canada and 731 leased departments. We operate our stores under the Motherhood Maternity, Mimi Matemity, A Pea in
`the Pod and Destination Maternity retail concepts and also sell our merchandise on the Internet at our MaternityMall.com and our bra11d—specific
`websites, as well as through an exclusive product and license agreement with Kohl’s. In addition to our 810 stores, our retail locations include 731
`leased departments within department and specialty stores. We design and contract manufacture approximately 90% of the merchandise we sell.
`
`Critical Accounting Policies and Estimates
`
`Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States.
`These generally accepted accounting principles require management to make estimates and assumptions that affect the reported amounts of assets
`and liabilities and disclosure of contingent assets and liabilities at the date of our consolidated financial statements and the reported amounts of
`net sales and expenses during the reporting period.
`
`Our significant accounting policies are described in Note 2 of “Notes to Consolidated Financial Statements.” We believe that the following
`discussion addresses our critical accounting policies, which are those that are most important to the portrayal of our financial condition and
`results of operations and require management’s most difficult, subjective and com plexjudgm ents, often as a result of the need to make estimates
`about the effect ofmatters that are inherently uncertain. lfaclual results were to differ significantly from estimates made, future reported results
`could be materially affected. However, we are not currently aware of any reasonably likely events or circumstances that would result in materially
`different results.
`
`Our senior management has reviewed these critical accounting policies and estimates and the related Management’s Discussion and
`Analysis of Financial Condition and Results of Operations with the Audit Committee of our Board of Directors.
`
`Inventor/'e,r. We value our inventories, which consist primarily of matemity apparel, at the lower of cost or market. Cost is determined or1 the
`first-in, first-out method (FIFO) a11d includes the cost ofmerchandise, freight, duty and broker fees. A periodic review of inventory quantities on
`hand is performed in order to determine if inventory is properly valued at the lower of cost or market. Factors related to current inventories such as
`future consumer demand and fashion trends. current aging, current analysis ofmerchandise based on receipt date, current and anticipated retail
`markdowns or wholesale discounts, and class or type of inventory are analyzed to determine estimated net realizable values. Criteria utilized by us
`to quantify aging trends include factors such as the amount ofmerchandise received within the past twelve months, merchandise received more
`than one year before with quantities on-hand in excess of 12 months of sales, and merchandise currently selling below cost. A provision is
`recorded to reduce the cost of inventories to its estimated net realizable value, if required. Inventories as of September 30, 2006 and 2005 totaled
`$94.3 million and $105.9 million. respectively, representing 32.8% and 38.8% of total assets, respectively. Given the significance of inventories to
`our consolidated financial statements, the determination of nct rcalizablc values is considered to bc a critical accounting cstimatc. Any significant
`unanticipated changes in the factors noted above could have a significant impact on the value of our inventories and our reported operating
`results.
`
`31
`
`Source: DESTINATION MATERNITY CORP., 10-K, 12/14/2006 I Powered by Intelligize
`
`DMC Exhibit 2038_O31
`
`Target v. DMC
`|PR2013-00530, 531, 532, 533
`
`
`
`L0ng—Lz'vedAssets. Our long—lived assets consist principally of store leasehold improvements (included in the “Property, plant and
`equipment. net” line item in our consolidated balance sheets) and, to a much lesser extent. lease acquisition costs (included in the “Other
`intangible assets, net” line item in our consolidated balance sheets). These long-lived assets are recorded at cost and are amortized using the
`/
`straight-line method over the shorter of the lease term or their useful life. Net long-lived assets as of September 30, 2006 and 2005 totaled $72.2
`million and $77.1 million, respectively, representing 25.1% and 28.2% of total assets, respectively.
`
`In assessing potential impairment of these assets, we periodically evaluate the historical and forecasted operating results and cash flows on a
`store-b y-store basis. Newly opened stores may take time to generate positive operating and cash flow results. Factors such as (i) store type. that
`is. company store or leased department, (ii) store concept, that is. Motherhood, Mimi, A Pea i11 the Pod or Destination Maternity, (iii) store
`location, for example, urban area versus suburb, (iv) c11rre11t rrrarketplace awareness of our brands, (v) local custorrrer demographic data, (vi) anchor
`stores within the mall in which our store is located and (vii) current fashion trends are all considered in determining the time frame required for a
`store to achieve positive financial results, which is assumed to be within two years from the date a store location is opened. If economic conditions
`are substantially different from our expectations, the carrying value of certain of our long—lived assets may become impaired. As a result of our
`impairment assessment. we recorded write-downs of long-lived assets of $2.6 million and $3.4 million during fiscal 2006 and fiscal 2005,
`respectively.
`
`Goodwill. The purchase method of accounting for business combinations requires the use ofestimates and judgments to allocate the
`purchase price paid for acquisitions to the fair value of the net tangible and identifiable intangible assets. Goodwill represents the excess of the
`aggregate purchase price over the fair value of net assets acquired in business combinations and is separately disclosed in our consolidated
`balance sheets. As ofboth September 30, 2006 and 2005, goodwill totaled $50.4 million, representing 17.5% and 18.4% of total assets, respectively.
`In June 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 142,
`“Goodwill and Other Intangible Assets." SFAS No. 142 requires that goodwill no longer be amortized, bL1t instead be tested for impairment at least
`annually or as impairment indicators arise.
`
`The impairment test requires us to compare the fair value of business reporting units to their carrying value, including assigned goodwill. In
`assessing potential impairment of goodwill, we have determined that we have one reporting unit for purposes of applying SFAS No. 142 based on
`our reporting structure. The fair value of our single reporting u11it is detennined based 011 the fair market value of our outstanding common stock
`or1 a control basis and, if necessary, a11 outside independent valuation is obtained to determine the fair value. The carrying value of our single
`reporting unit, expressed on a per share basis, is represented by the book value per share of our outstanding common stock. The results of the
`annual impairment tests performed as of September 30, 2006, 2005 and 2004 indicated the fair value of the reporting unit exceeded its carrying value.
`As part of the Company’s impairment analysis as of September 30, 2005, an outside independent valuation was obtained and the fair value of the
`Company’s single reporting unit exceeded the carrying value. As of September 30, 2006, our book value was $14.35 per share of outstanding
`cornrnon stock and the closing trading price of our cornnron stock was $48.12 per share. If the per share fair value of o11r single reporting unit was
`less than the book value per share on September 30, 2006, our goodwill would likely have been impaired.
`
`Accourzzmgfor Income Taxes. As part of the process of preparing our consolidated financial statements, we are required to estimate our
`income taxes in each of the jurisdictions in which we operate. This process requires us to estimate our actual current tax exposure together with
`assessing temporary ditferences resulting from differing treatment of items, such as depreciation of property and equipment and valuation of
`inventories, for tax and accounting purposes. We determine our provision for income
`
`Source: DESTINATION MATERNITY CORP., 10-K, 12/14/2006 I Powered by Intelligize
`
`DMC Exhibit 2038_032
`
`Target v. DMC
`|PR2013-00530, 531, 532, 533
`
`
`
`taxes based on federal and state tax laws and regulations currently in effect, some of which have been recently revised. Legislation changes
`currently proposed by certain of the states in which we operate, if cnactcd, could increase our transactions or activities subject to tax. Any such
`legislation that becomes law could result in an increase in our state income tax expense and our state income taxes paid, which could have a
`material and adverse effect on our net income or cash flow.
`
`The temporary differences between the book and tax treatment of income and expenses result in deferred tax assets and liabil