MOTHERS VVORK, INC. AND SUBSIDIARIES
`NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
`
`2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
`v. Statements uf Cash Flows
`
`In fiscal 2006, 2005 and 2004, the Company paid interest of $14,748,000, $14,470,000 and $14,415,000, respectively, and made income tax
`payments of $5,352,000, $708,000 and $3,258,000, respectively. In fiscal 2005, tl1e Company acquired equipment with a cost of $1,438,000 under a
`capital lease obligation.
`
`w. Business and Credit Risk
`
`Financial instruments, primarily cash and cash equivalents, short-term investments and accounts receivable, potentially subject the Company
`to concentrations of credit risk. The Company limits its credit risk associated with cash and cash equivalents and short-term investments by
`placing such investments in highly liquid funds and instruments. Receivables associated with third-party credit cards are processed by financial
`institutions, which are monitored for financial stability. The Company is dependent on key suppliers to provide sufficient quantities of inventory at
`competitive prices. No single supplier represented 10% or more ofnct purchases in fiscal 2006, 2005 or 2004. A megority of the Company’s
`purchases during fiscal 2006 were imported. Management believes that any event causing a disruption ofimports from any specific country could
`be mitigated by moving production to readily available alternative sources.
`
`x. Insurance
`
`The Company is self-insured for workers’ compensation and employee-related health care benefits, up to certain stop-loss limits. Such costs
`are accrued based oi1 known claims and an estimate of incurred but i1ot reported claims. Further, the Company utilizes a cooperative arrangement
`with a number of other companies to assist in managing certain insurance risks. The Company’s expenses associated with this relationship could
`be impacted by the loss history associated with the cooperative as a whole. Liabilities associated with these risks are estimated by considering
`historical claims experience and other actuarial assumptions.
`
`y. Store Preapening Casts
`
`Non-capital expenditures, such as payroll costs incurred prior to the opening of a new store, are charged to expense in the period in which
`they were incurred.
`
`2, New Accounting Prunuuncements
`
`In May 2005, the Financial Accounting Standards Board (“FASB") issued SFAS No. 154, “Accounting Changes and Error Corrections."
`SFAS No. 154 provides guidance on the accounting for and reporting of accounting changes and error corrections. This statement is effective for
`accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005 and early adoption is permitted. The
`Company will adopt SFAS No. 154 effective as of October 1, 2006.
`In June 2006, the FASB issued FASB Interpretation l\o. 48, “Accounting for Uncertainty in Income Taxes.” FASB Interpretation .\lo. 48
`provides guidance for the recognition and measurement of uncertain tax positions in an enterprise’s financial statements. Recognition involves a
`determination of whether it is more likely than not that a tax position will be sustained upon examination with the presumption that the tax position
`will be examined by the appropriate taxing authority that would have full knowledge of all relevant information. This interpretation is effective for
`fiscal years beginning after December 15, 2006.
`
`F- 13
`
`Source: DESTINATION MATERNITY CORP., 10-K, 12/14/2006 I Powered by Intelligize
`
`DMC Exhibit 2038_O64
`
`Target v. DMC
`|PR2013-00530, 531, 532, 533
`
`

`
`MOTHERS VVORK, INC. AND SUBSIDIARIES
`NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
`
`2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
`Early adoption is permitted if tl1e enterprise has not issued financial statements, including interim financial statements, in the period of adoption.
`The impact from adoption of FASB Interpretation No. 48, if any, on the Company’s consolidated financial position or results of operations has 11ot
`yet been dete1n1i11ed.
`
`In June 2006, the Emerging Issues Task Force (“EITF”) issued EITF Issue 06-3, “How Taxes Collected from Customers and Remitted to
`Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation)?’ EITF Issue 06-3 provides
`guidance related to the presentation in financial statements of any tax assessed by a governmental authority that is directly imposed on a revenue-
`producing transaction between a seller a11d a customer, including. but not limited to, sales, use, value added, and son1e excise taxes. The EITF
`concluded that thc presentation of taxcs within the scope of EITF lssuc 06-3 on cithcr a gross (includcd i11 rcvc11ucs and costs) or a not (cxcludcd
`from revenues) basis is an accounting policy decision that should disclosed. In addition, the aggregate amount of any such taxes that are reported
`on a gross basis should be disclosed i11 interim and annual financial slaleinenls. The guidance in EITF Issue 06-3 is ellective for interim and annual
`reporting periods beginning after December 15, 2006. The Company presently reports taxes within the scope of EITF Issue 06-3 011 a net basis and
`adoptio11 is not expected to have an impact 011 tl1e Company’s consolidated financial statements.
`
`3. INVENTORIES
`
`Inventories as of September 30 were comprised of tl1e following (i11 thousands):
`
`Finished goods
`Work—in—progress
`Raw materials
`
`2006
`$ 86,937
`2,736
`4,586
`$ 94,259
`
`$
`
`2005
`97,056
`3,283
`5,572
`$ 105,911
`
`4. PROPERTY, PLANT AND EQUIPMENT, NET
`
`Property, plant and equipment as of September 30 was comprised of tl1e following (in thousands):
`
`Land
`Building and improvcmcnts
`Furniture and equipment
`Leasehold improvements
`
`Lcss: accumulatcd dcprcciation and amortization
`
`2006
`1.400
`12,762
`56,608
`103,160
`173,930
`(102,500 )
`71,430
`
`$
`
`$
`
`2005
`1,400
`12,474
`53,917
`102,149
`169,940
`(93,767)
`76,173
`
`5:
`
`$
`
`Furniture and equipment includes equipment acquired under a capital lease obligation on December 1, 2004. As of September 30, 2006, the
`equipment had a cost of $l.438,000 a11d accumulated amortization of $546,000 (see Note 9).
`
`F-14
`
`Source: DESTINATION MAT'ERNITY CORR,
`
`‘lO~K, 12/'14/2006 | Powered by Intelligize
`
`DMC Exhibit 2038_O65
`
`Target v. DMC
`|PR2013-00530, 531, 532, 533
`
`

`
`MOTHERS VVORK, INC. AND SUBSIDIARIES
`NOTES TO CONSOLIDATED FIVANCIAL STATEMENTS (Continued)
`
`4. PROPERTY, PLANT AND EQUIPMENT, NET (Continued)
`
`Duri11g fiscal 2006, 2005 a11d 2004, the Company recorded pre—taX charges under SFAS No. 144, “Accounting for the Impairment or Disposal of
`Long-Lived Assets.” of $2,578,000, $3,151,000 and $1,816,000. respectively, related to the impairment of leasehold improvements and furniture a11d
`equipment at certain of its retail locations.
`
`As of Septcmbcr 30, 2006, $700,000 of assets hcld for salc (not includcd abovc) rclatc to thc manufacturing and warehousc facilitics located in
`Costa Rica that were acquired in the purchase ofiMatemity (see Note 5).
`
`These facilities, shut dow11 during fiscal 2002, are being marketed for sale, are not being depreciated and are separately reflected in the
`accompanying Consolidated Balance Sheets as “Assets held for sale.” One of these facilities was sold in fiscal 2006 for $225,000. The two
`remaining Costa Rica manufacturing and warehousing facilities are expected to be sold during fiscal 2007. The carrying values of the Costa Rican
`facilities were reduced by $275,000 during fiscal 2005 to their estimated realizable values, which were determined based 011 purchase offers from
`interested parties, less estimated selling costs.
`
`5. EXIT/RESTRIICTURHVG ACTIVITIES RELATED TO ACQUISITION
`
`A summary of tl1e charges incurred and reserves recorded in connection with the especialty Brands, LLC (“iMaternity") acquisition on
`October 17, 2001 for exit/restructuring activities during fiscal 2006, 2005 and 2004 is as follows (in thousands):
`Lcasc
`Exit and
`Termination
`Other
`Total
`Fees
`Costs
`$ 8,937
`S 4,200
`$ 2,150
`$ 1,593
`S
`668
`$
`325
`(743 )
`(419 )
`(124)
`850
`249
`201
`(618)
`(249 )
`(169)
`232
`32
`(232)
`(32)
`$ — $ —
`
`Reserves recorded in purchase accounting
`P>alance—September 30, 2003
`Charges during fiscal 2004
`Balancc—Septcmbcr 30, 2004
`Charges during fiscal 2005
`Balance
`September 30, 2005
`Chargcs during fiscal 2006
`Balance—September 30, 2006
`
`Severance
`$ 2,587
`$
`600
`(200 )
`400
`(200 )
`200
`(200 )
`$ —
`
`—
`S —
`
`F-15
`
`Source: DESTINATION MATERNITY CORR,
`
`‘lO~K, 12/'14/2086 | Powered by Intelligize
`
`DMC Exhibit 2038_O66
`
`Target v. DMC
`|PR2013-00530, 531, 532, 533
`
`

`
`MOTHERS VVORK, INC. AND SUBSIDIARIES
`NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
`
`6.ACCRUED EXPENSES AND OTHER CURRENT LLABILITIES
`
`Salaries, wages and employee benefits
`I11co1ne taxes payable
`Interest
`Deferred rent
`Sales taxes
`Insurancc
`Audit a11d legal
`Remaining payout for redeemed Series A Preferred Stock
`Accrued store construction costs
`Gifi certificates and store credits
`Other
`
`As of September 30. accrued expenses a11d other current liabilities were comprised of the following (in thousands):
`2006
`$ 14,657
`1,565
`2,273
`4,192
`3.170
`1,892
`4,137
`679
`681
`3.895
`7,312
`$ 44,453
`
`$
`
`2005
`8,846
`1,161
`2,483
`3,790
`2,456
`2.671
`3,400
`679
`152
`3,233
`6,692
`$ 35,563
`
`7. DEFERRED RENT AND OTHER l\ON-CURREN'1‘ LIABILITIES
`
`As of September 30. deferred re11t and other non—current liabilities were comprised of the following (in thousands):
`2006
`2005
`55 27,410
`S 29,169
`(4,192 )
`(3,790 )
`23,218
`25,379
`1,423
`291
`$ 24,641
`S 25,670
`
`Deferred rent
`Less: current portion included in accrued expenses and other current liabilities
`Non—current deferred rent
`Other
`
`8. LINE OF CREDIT
`
`On October 15, 2004, the Company entered i11to a new five-year $60,000,000 senior secured revolving credit facility (the “Credit Facility”),
`which replaced the former $60 million credit facility that included a $56,000,000 borrowing base revolving line of credit. The Credit Facility will
`n1aturc 011 Octobcr 15, 2009. Upon thc Company’s request and with the consent of thc lendcr, pcrrnittcd borrowings undcr thc Crcdit Facility may
`be increased up to an additional $l 5,000,000, in increments of $2,500,000, up to a maximum limit of $75,000,000. Proceeds from advances under the
`Credit Facility, with certain restrictions, may be used to provide financing for working capital, letters of credit, capital expenditures, debt
`prepayments, dividends, share repurchases and other general corporate purposes. The Company paid certain closing fees in connection with the
`negotiation a11d execution of the Credit Facility. The Company also pays an unused line fee under the Credit Facility and certain early termination
`fees would bc owcd if thc Crcdit l-'acility is tcrminatcd prior to its third annivcrsary. 'l'hc Credit Facility contains various aflirniativc and ncgativc
`covenants and representations and warranties. There are no financial covenant requirements under the Credit Facility unless either (i) Excess
`Availability (as defined in the agreement) falls below $10,000,000, or
`
`F- 16
`
`Source: DESTINATION MAT'ERNITY CORR,
`
`‘lO~K, 1.?/'14/2006 | Powered by Intelligize
`
`DMC Exhibit 2038_O67
`
`Target v. DMC
`|PR2013-00530, 531, 532, 533
`
`

`
`MOTHERS VVORK, INC. AND SUBSIDIARIES
`NOTES TO CONSOLIDATED FIVANCIAI, STATEMENTS (Continued)
`
`8. LINE OF CREDIT (Continued)
`
`(ii) average Financial Covenant Adjusted Availability (as defined in the agreement) for any calendar month is less than $15,000,000. If either of the
`events in item (i) or (ii) above occurs, the Company would be required to meet a certain minimum fixed charge coverage ratio (which increases from
`l.0Ox during the first two years of the Credit Facility to l.l0x during the fifth year ofthe Credit Facility). During all of fiscal 2006 and 2005, the
`Company exceeded the requirements for the Excess Availability and average Financial Covenant Adjusted Availability. The Credit Facility is
`secured by a security interest in the Company's accounts receivable, inventory, real estate interests, letter of credit rights, cash, intangibles and
`certain other assets. The interest rate on outstanding borrowings is equal to, at the Co1npany’s election, either the lender’s prime rate or the
`lender’s LIBOR rate plus the applicable margin. The applicable margin for LIBOR rate borrowings is variable, ranging from 1.2 % to 1.75%. based
`upon the availability calculation made in accordance with the Credit Facility. The applicable margin for LIBOR rate borrowings, based upon the
`availability calc11latio11 made i11 accordance with the agreement, has been 1.25% since the inception of the Credit Facility. Any amounts
`outstanding under the Credit Facility may be accelerated and become due and payable immediately and all loan and letter of credit commitments
`thereunder may be terminated upon an event of default and expiration of any applicable cure period. Events of default include: (i) nonpayment of
`obligations due under the Credit Facility, (ii) failure to perform any covenant or agreement contained in the Credit Facility, (iii) material
`misrepresentations. (iv) failure to pay, or certain other defaults under, other material indebtedness of the Company, (V) certain bankruptcy or
`insolvency events, (vi) a change of control, (vii) material uninsured losses, (viii) indictments of the Company or senior management in a material
`forfeiture action, and (ix) customary ERISA defaults, among others.
`
`As of September 30, 2006, outstanding borrowings under tl1e Credit Facility consisted of no direct borrowings and $8,460,000 in letters of
`credit with $51,540,000 of availability under the credit li11e, compared to no direct borrowings and $8,445,000 i11 letters of credit with $51,555,000 of
`availability under the credit line as of September 30, 2005. Borrowings under the Credit Facility as of September 30, 2006 would have borne interest
`at a ratc ofbctwccn approximatcly 6.57% and 8.25% pcr annum. During fiscal 2006 and 2005, the Company’s avcragc lcvcl of direct borrowings
`under the Credit Facility was $0.3 million and $3.1 million, respectively.
`
`F- 17
`
`Source: DESTINATION MATERNITY CORP., 10-K, 12/14/2006 I Powered by Intelligize
`
`DMC Exhibit 2038_O68
`
`Target v. DMC
`|PR2013-00530, 531, 532, 533
`
`

`
`MOTHERS VVORK, INC. AND SUBSIDIARIES
`NOTES TO CONSOLIDATED FIVANCIAL STATEMENTS (Continued)
`
`9. LONG—TERM DEBT
`
`The following table summarizes the Company’s long—term debt as of September 30 (iii thousands):
`
`111/4% senior notes due August 1, 2010 (net of unamortized discount)
`Industrial Revenue Bond, interest is variable (5.3% as of September 30, 2006),
`principal due annually until September 1, 2020 (collateralized i11 fi1ll by a
`standby letter of credit)
`Government Mortgage Notes:
`Interest at 3.0%, principal due monthly until May 1, 201 l (collateralized by a
`second mortgage on certai11 property and equipment at the Company’s
`headquarters)
`Interest at 2.0%. principal due monthly until March 1, 2011 (collateralized by
`certain equipment at the Company’s headquarters)
`Cap/T11] Lease Obllgzzt/17/1."
`Equipment lease, interest at 6.75%, payments due monthly until November 30,
`2007 (collateralized by certain equipment at the Company’s headquarters)
`
`Less: current portion
`
`Long-term debt maturities as of September 30, 2006 are as follows (in thousands):
`Fiscal
`Year
`
`2007
`2008
`2009
`2010
`2011
`2012 and thereafter
`
`Less: unamortized discount
`Less: amount representing interest on capital lease obligation
`
`2006
`$ 114,130
`
`2005
`$ 123,868
`
`2,810
`
`2,945
`
`721
`
`100
`
`863
`
`120
`
`583
`118.349
`(814 )
`$ 117,535
`
`1,060
`128.856
`(769)
`$ 128,087
`
`$
`
`836
`410
`338
`115,347
`296
`2,015
`119.242
`(870)
`(23 )
`$ 118.349
`
`In August 2002, the Company issued $125,000,000 oflll/4% senior notes (the “Senior Notes”). The Senior Notes are due August 1, 2010 a11d
`were issued at 98.719% of their face amount. resulting in an annual effective interest rate of 11.50%. Interest on the Senior Notes is payable semi-
`annually in cash on February 1 and August 1, commencing 011 February 1, 2003. The Senior Notes were issued by Mothers Work, are senior
`unsecured obligations of Mothers V\7ork, and are unconditionally guaranteed on a senior basis by all of the Company’s domestic subsidiaries (see
`Note 15). The Senior Notes are redeeniable at the Company’s option, i11 whole or i11 pait at any time o11 or after August 1, 2006, at 105.625% of their
`face amount, plus accrued and unpaid interest, declining ratably to 100% of their face amount, plus accrued
`
`F-18
`
`Source: DESTINATION MATERNITY CORR,
`
`‘lO~K, 12/'14/2086 | Powered by Intelligize
`
`DMC Exhibit 2038_O69
`
`Target v. DMC
`|PR2013-00530, 531, 532, 533
`
`

`
`MOTHERS VVORK, INC. AND SUBSIDIARIES
`
`NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
`
`9. LONG-TERM DEBT (Continued)
`and unpaid interest, on or after August 1, 2009. The irrdenture to the Senior Notes contains covenants that impose certain restrictions on the
`Company’s ability to, among other things. incur additional indebtedness, pay dividends, repurchase stock, and enter into other various types of
`transactions. Subject to the foregoing restrictions, the Senior Notes also linrit the amount of dividends a11d other restricted payrrrents that nray be
`paid by the Company under a formula that includes a $10 million fixed amount, plus approximately 50% of the Company’s net income since
`issuance of the Senior Notes and allowable proceeds from certain other debt or equity transactions. During all of fiscal 2006, 2005 and 2004, the
`Company was in compliance with the required covenants. Any amounts outstanding under the Senior Notes may be accelerated and become due
`and payable immediately upon an event of default and expiration of any applicable cure period. Events of default include: (i) nonpayment of
`obligations due under the Senior Notes, (ii) failure to perform any covenant or agreement contained in the Senior Notes, (iii) material
`misrepresentations, (iv) failure to pay, or certain other defaults under, other material indebtedness of the Company, (V) certain bankruptcy or
`insolvency events, and (vi) material uninsured losses. Upon the occurrence of a Change in Control, as defined in the indenture to the Senior
`Notes, Holders of the Senior Notes have the right to require that the Company repurchase each Holder’s Notes at 101% of the principal amount.
`plus accrued and unpaid interest.
`
`In connection with the issuance of the Senior Notes, the Company incurred deferred financing costs of $4,497,000. These deferred financing
`costs, along with the debt discount, are being amortized and included in interest expense over the term of the Senior Notes, using the effective
`interest method.
`
`I11 August 2006, the Company’s Board of Directors authorized the repurchase of up to S10.0 million principal arrrourrt of the Senior Notes.
`During August and September 2006, the Company completed the repurchase of the authorized amount in two transactions at an aggregate of
`105.832% of the $10.0 million principal amount, plus accrued and unpaid interest. In connection with the repurchases, the Company recorded pre-
`tax charges totaling $873.000, representing the premium paid plus the write-off of unamortized debt issuance discount and deferred financing costs.
`On December 8, 2006, the Company completed the repurchase of S25.0 million of the Senior Notes (see Note 22).
`On December 1, 2004, the Company amended an cxisting operating lease for certain cquipmcnt in its main distribution facility, extending the
`remaining lease term to November 30, 2007 (the “Primary Term Expiration Date”). The amended lease was determined to be a capital lease ir1
`accordance with the provisions of SFAS No. 13, “Accounting for Leases." The lease provides for monthly rental payments through the Primary
`Term Expiration Date with a final installment of one dollar to purchase the equipment.
`
`10. COMNION AND PREFERRED STOCK
`
`The Company has authorization to issue up to 2,000,000 shares of preferred stock, par value $0.01 with 41,000 shares authorized Series A
`Cumulative Convertible Preferred Stock and 300,000 shares authorized Series B Junior Participating Preferred Stock (“Series B Preferred Stock”).
`There was no preferred stock issued or outstanding as of September 30, 2006 or 2005.
`
`The Series B Preferred Stock can be purchased in units equal to one one-thousandth of a share (the “Series B Units") under the terms ofthe
`Rights Agreement (see Note 11). The holders of the Series B Units are entitled to receive dividends when and if declared on common stock. Series
`B Units are junior to
`
`F— 19
`
`Source: DESTINATION MATERNITY CORP., 10-K, 12/14/2006 I Powered by Intelligize
`
`DMC Exhibit 2038_070
`
`Target v. DMC
`|PR2013-00530, 531, 532, 533
`
`

`
`MOTHERS VVORK, INC. AND SUBSIDIARIES
`
`NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
`
`10. COMMON AND PREFERRED STOCK (Continued)
`the common stock for both dividends and liquidations. Each Series B Unit votes as one share of common stock.
`
`During fiscal 2003, the Board of Directors approved a share repurchase program under which the Company was authorized to repurchase up
`to $10,000,000 of its outstanding common stock from time to time in private transactions or on the open market through March 4, 2005. As of
`September 30, 2005, the Company had purchased and retired 142,269 shares in the aggregate 1111der the repurchase program at a total cost of
`$3,242,000, or an average cost of $22.79 per share, of which 75,715 shares were repurchased in fiscal 2004, at an average cost of $23.44 per share.
`There were no repurchases under the repurchase program during fiscal 2005. The indenture governing the Senior Notes and the terms of the
`Company’s Credit Facility contain restrictions that place limits on certain payments by the Company, including payments to repurchase shares of
`its common stock. The Company’s repurchases of common stock have been made in compliance with all restrictions under the indcnture
`governing the Senior Notes and the terms of its Credit Facility.
`
`1 1 . RIGHTS AGREEMENT
`
`On October 9, 2005. the Company entered into an Amended and Restated Rights Agreement to renew its then existing Rights Agreement
`(collectively referred to as the “Rights Agreement”) that would otherwise have expired on October 9, 2005. Under the Rights Agreement, the
`Company provided and will provide one Right (the “Right”) for each share of Mothers Work common stock now or hereafter outstanding. Under
`certain limited conditions, as defined in tlie Rights Agreement, each Right entitles the registered holder to purchase fi’on1 tl1e Company one Series
`B Unit at $85 per share, subject to adjustment. The Rights expire on October 9, 2015 (the “Final Expiration Date”).
`The Rights Agreement provides the independent directors of the Company with some discretion in determining when the Distribution Date
`(as defined in the Rights Agreement) shall occur and the date until which the Rights may be redeemed. In addition, the Rights Agreement exempts
`from its operation any person that acquires. obtains the right to acquire, or otherwise obtains beneficial ownership of 15.0% or more of the then
`outstanding shares of the Company’s common stock (an “Acquiring Person”) without any intention of changing or influencing control of the
`Company provided that such person, as promptly as practicable, divests himself or itself of a sufficient number of shares of common stock so that
`such person would no longer be an Acquiring Person.
`
`The Rights are not exercisable until tl1e Distribution Date, which will occur upon the earlier of (i) tell business days following a public
`announcement that an Acquiring Person has acquired beneficial ownership of 15.0% or more of the Company’s outstanding common stock, and
`ten business days following the commencement of a tender offer or exchange offer that would result in a person or group owning 15.0% or more of
`the Company’s outstanding common stock, or (ii) such later date as may be determined by action of a majority of the independent directors. The
`Rights have certain anti-takeover effects. The Rights will cause substantial dilution to a person or group that attempts to acquire the Company
`without conditioning tl1e offer on the redemption of the Rights.
`
`F-20
`
`Source: DESTINATION MATERNITY CORP., 10-K, 12/14/2006 I Powered by Intelligize
`
`DMC Exhibit 2038_O71
`
`Target v. DMC
`|PR2013-00530, 531, 532, 533
`
`

`
`MOTHERS VVORK, INC. AND SUBSIDIARIES
`NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
`
`1 1. RIGHTS AGREEMENT (Continued)
`The Rights can be mandatorily redeemed by action of a majority of the independent directors at any time prior to the earlier of the Final
`Expiration Date and the Distribution Date for $0.01 per Right. Upon exercise and the occurrence of certain events, as defined in the Rights
`Agreement, each holder of a Right, except the Acquiring Person, will have the right to receive Series B U11its, or connnon stock of tlie acquiring
`company, in each case having a Value equal to two times the exercise price of the Right.
`
`12. STOCK OPTION PLANS AND VVARRANTS
`
`The Company has three stock option plans: the Director Stock Option Plan (the “Director Plan”), the Amended and Restated 1987 Stock
`Option Plan (the “l987 Plan”) and the 2005 Equity Incentive Plan (the “2005 Plan”). The Director Plan expired on December 31, 2004 and no further
`options may be granted under that plan. Options issued under the Director Plan will remain outstanding until they have expired, been exercised or
`have otherwise terminated. Under the 1987 Plan, officers and certain em aloyees, including outside directors, may be granted options to purchase
`the Company’s common stock with exercise prices as determined by the Compensation Committee of the Board of Directors that are no lower than
`the fair market value ofthe stock on the date of grant. In February 2003, the stockholders of the Company approved an amendment to increase the
`number of shares ofcommon stock available for issuance upon the exercise of options granted under the l 987 Plan by 500,000, such that a total of
`2,175,000 options could be issued under the 1987 Plan and the Director ’lan (including up to a total of 200,000 options which were issuable under
`the Director Plan). In January 2006, the stockholders of the Company approved the adoption of the 2005 Plan. Under the 2005 Plan, employees,
`directors, consultants and other individuals who provide services to the Company, may be granted awards in the form of options. stock
`appreciation rights, rcstrictcd stock or rcstrictcd stock units. Up to 500,000 sharcs of the Company’s common stock may be issued in rcspcct of
`awards under the 2005 Plan, with no more than 250,000 of those shares uermitted to be issued in respect of restricted stock or restricted stock units
`granted under the 2005 Plan, and awards of options to purchase the Company’s common stock will have exercise prices as determined by the
`Compensation Committee of the Board of Directors that are no lower than the fair market value of the stock on the date of grant.
`
`Effective October 1, 2004, each outside director is granted 5,000 fu ly vested options on an annual basis, with an exercise price equal to the
`fair market value of the stock on the grant date. No options have been granted by the Company with an exercise price less than the fair market
`value of the Company’s common stock on the date of grant for any of the periods presented. 'lhe majority of the options issued under the plans
`vest ratably over a five-year period, although some options vest immediately, and options issued under the plans generally expire ten years from
`the date of grant. The Company issues new shares upon exercise of ves ed options. As of September 30, 2006, there were 564,127 options available
`for grant under the plans.
`
`:.21
`
`Source: DESTINATION MATERNITY CORP., 10-K, 12/14/2006 I Powered by Intelligize
`
`DMC Exhibit 2038_072
`
`Target v. DMC
`|PR2013-00530, 531, 532, 533
`
`

`
`MOTHERS VVORK, INC. AND SUBSIDIARIES
`NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
`
`12. STOCK OPTION PLANS AND WARRANTS (Continued)
`Stock option activity for all plans was as follows:
`
`Balance September 30, 2003
`Grantcd
`Exercised
`Forfeited
`Expired
`Balance—September 30, 2004
`Granted
`Exercised
`Forfeited
`Expired
`Balance—Seplember 30, 2005
`Granted
`Excrciscd
`Forfeited
`Expired
`Balance September 30, 2006
`
`Outstanding
`Options
`(in
`thousands)
`1,094
`233
`(80 )
`(50 )
`(6 )
`1,191
`368
`(82 )
`(236 )
`(ll
`)
`l,Z30
`282
`(302 )
`(36 )
`(86 )
`1,088
`
`Exercisable—Septernber 30, 2006
`
`634
`
`Weighted
`Average
`Exercise
`Price
`
`Weighted
`Average
`Remaining
`Life
`
`(Vears)
`
`Aggregate
`Intrinsic
`Value
`(in
`thousands)
`
`$ 16.36
`23.41
`11.14
`24.97
`28.07
`17.67
`13.04
`9.74
`29.26
`25.92
`14.50
`14.35
`16.38
`11.10
`15.46
`1399
`
`3 1408
`
`5_7
`
`53
`
`$ 37.138
`
`$ 21,596
`
`As ofSeptember 30, 2006, $4,556,000 of total unrecognized compensation cost related to non-vested awards is expected to be recognized over
`a weighted-average period ofl.5 years. During the years ended September 30, 2006, 2005 and 2004, the total intrinsic value of options exercised
`was $5,085,000, $364,000 and $914,000, respectively. The total cash received from these option exercises was $4,913,000, $485,000 and $276,000,
`respectively, and the actual tax benefit realized for the tax deductions from these option exercises was $1,983,000, $115,000 and $311,000.
`rcspcctivcly. During fiscal 2005, options to purchase 27,270 shares of common stock with an aggregate exercise price of $307,000 wcrc cxcrciscd by
`the option holders tendering 20,286 shares of the Company’s common stock, which were held by the option holders. During fiscal 2004, options to
`purchase 54,540 shares of con1mo11 stock with an aggregate exercise price of $614,000 were exercised by the option holders tendering 28,438 shares
`of the Company’s common stock, which were held by the option holders.
`
`On September 27, 2005, the Company accelerated the vesting of all outstanding stock options having per share exercise prices of $23.50 or
`n1ore. Options to purchase 133,500 shares, having exercise prices ranging from $23.62 to $37.05 per share, were affected by the vesting acceleration.
`
`Source: DESTINATION MATERNITY CORR,
`
`‘lO~K, 12/'14/2006 | Powered by Intelligize
`
`
`
`DMC Exhibit 2038_O73
`
`Target v. DMC
`|PR2013-00530, 531, 532, 533
`
`

`
`MOTHERS VVORK, INC. AND SUBSIDIARIES
`NOTES TO C‘ONSOLIDATED FIVANCIAL STATEMENTS (Continued)
`
`12. STOCK OPTION PLANS AND WARRANTS (Continued)
`
`The weighted average fair value ofthe stock options granted during fiscal 2006, 2005 and 2004 was estimated to be $8.60, $8.74 and $15.85,
`respectively. The weighted average fair value of each option granted is calculated on the date of grant using the Black-Scholes option-pricing
`model with the following weighted-average assumptions:
`
`Dividend yield
`Expected price volatility
`Risk-free interest rates
`Expected lives
`
`Year Ended September 30,
`2006
`2005
`2004
`none
`none
`none
`58 %
`61 %
`62 %
`4.5 %
`4.0 %
`3.9 %
`6.4 years
`8.0 years
`8.1 years
`
`Expected volatility was determined using a weighted average of the historic volatility of the Company’s common stock as of the option grant
`date measured over a period equal to the expected life of the grant. Risk-free interest rates were based on the U. S. Treasury yield curve in effect at
`the date of the grant. Expected lives were determined using the simplified method, which measures the average of the option vesting term and the
`option contractual term.
`The following table summarizes information about stock options outstanding as of September 30, 2006:
`
`Ontions Outstanding
`Weighted
`Average
`Remaining
`Life
`
`Range ol'Exercise
`Prices
`
`$ 7.40 to $ 8.00
`8.01 to 9.00
`9.01 to 10.00
`10.01 to 12.00
`12.01 to 13.00
`13.01 to 15.00
`15.01 to 23.50
`23.51 to 24.00
`24.01 to 37.00
`37.01 to 37.05
`$ 7.40 to $37.05
`
`Number
`Outstanding
`(in
`thousands)
`66
`77
`174
`232
`272
`47
`48
`66
`78
`28
`1,088
`
`5.1
`2.7
`3.2
`8.0
`8.1
`8.4
`9.0
`7.2
`8.1
`6.2
`6_7
`
`Ontions Exercisable
`Weighted
`Average
`Exercise
`Price
`
`Weighted
`Average
`Exercise
`Price
`
`$
`
`7.67
`8.94
`9.39
`10.11
`12.84
`14.11
`21.45
`23.62
`29.10
`37.05
`$ 1399
`
`Number
`Exercisable
`(in
`thousands)
`51
`76
`174
`54
`116
`26
`2
`66
`41
`28
`634
`
`$
`
`7.68
`8.95
`9.39
`10.35
`12.85
`13.76
`18.63
`23.62
`28.61
`37.05
`$ 14_03
`
`111 connection with the acquisition of iMatemity 011 October 17. 2001 (see Note 5). the Company issued to the sellers warrants to purchase
`350,000 shares ofthe Company’s common stock at an exercise price of $22.50 per share (the “Warrants”). The Warrants were immediately vested
`upon grant and were exercisable for seven years from the date of grant. 111 the fourth quarter of fiscal 2006, certain holders of the Warrants turned
`in Warrants to purchase 125,000 shares of the Company’s common stock and were issued 53,873 shares of the Company’s common stock pursuant
`to cashless exercise net issuance elections. As