REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
`
`The Board of Directors a11d Stockholders
`Destination Maternity Corporation:
`
`We have audited the accompanying consolidated balance sheets of Destination Maternity Corporation and subsidiaries as of September 30,
`2013 and 2012, and the related consolidated statements of income. comprehensive income, stockholders’ equity and cash flows for each of the
`years in the three-year period ended September 30, 2013. In connection with our audits of the consolidated financial statements, we also have
`audited the related financial statement schedule, Valuation and Qualifying Accounts. These consolidated financial statements and financial
`statement schedule are tl1e responsibility of the Company’s Inanagernent. Our responsibility is to express a11 opinion on these consolidated
`financial statements and financial statement schedule based on our audits.
`
`We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
`standards require that We plan and pcrform the audit to obtain reasonable assurance about whcthcr thc financial statements are frcc of material
`misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit
`also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial
`statement presentation. We believe that our audits provide a reasonable basis for our opinion.
`
`In our opinion, the consolidated financial statcments referred to above prcscnt fairly. in all material respects, thc financial position of
`Destination Maternity Corporation and subsidiaries as of September 30, 2013 and 2012, and the results of their operations and their cash flows for
`each of the years in the three-year period ended September 30, 2013. in conformity with U.S. generally accepted accounting principles. Also in our
`opinion, t11e related financial statement schedule, when considered ir1 relation to the basic consolidated fi11ar1cial statements take11 as a whole,
`presents fairly, in all material respects, the information set forth therein.
`
`We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Destination
`Maternity Corporation’s internal control over financial reporting as of September 30. 2013. based on criteria established in Internal Control—
`Integrated Framewur/c (J 992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated
`December 13, 2013 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
`
`/V KPMG LLP
`
`Philadelphia, Pennsylvania
`December 13, 2013
`
`r'— 2
`
`Source: Destination Maternity Corp, 10—K, 12/13/2013 | Powered by Intelligize
`
`DMC Exhibit 2042_O55
`
`Target v. DMC
`|PR2013-00530, 531, 532, 533
`
`

`
`DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES
`
`CONSOLIDATED BALANCE SHEETS
`
`(in thousands, except share and per share amounts)
`
`ASSETS
`
`Current assets:
`
`Cash and cash equivalents
`Trade receivables, net
`Inventories
`Deferred income taxes
`Prepaid expenses and other current assets
`Total current assets
`Property, plant and equipment. net
`Other assets:
`
`Deferred financing costs, net of accumulated amortization of $181 and $751
`Other intangible assets, net of accumulated amortization of$1,166 and $2,123
`Deferred income taxes
`Other non-current assets
`Total other assets
`Total assets
`
`Current liabilities:
`
`LIABILITIES AND STOCKHOLDERS’ EQUITY
`
`Line of credit borrowings
`Current portion of long—terrn debt
`Accounts payable
`Accrued expenses and other current liabilities
`Total current liabilities
`Deferred rent and other non-current liabilities
`Total liabilities
`
`Commitments and contingencies (Note 15)
`
`Stockholders’ equity:
`Preferred stock, 1,656,381 shares authorized
`Series B junior participating preferred stock, S.01 par value; 300,000 shares authorized, none outstanding
`Cor1m1o11 stock, $.01 par value‘, 20,000,000 shares authorized, 13,556,331 and 13,370,149 shares issued and
`outstanding, respectively
`Additional paid—in capital
`Retained earnings
`Accumulated other comprehensive loss
`Total stockholders’ equity
`Total liabilities and stockholders’ equity
`
`September 30,
`2013
`2012
`
`24,555
`12,463
`86,546
`8,012
`6,927
`138,503
`53,447
`
`807
`2,344
`12,470
`410
`16,031
`207,981
`
`$
`
`$
`
`— $
`—
`23,810
`39,417
`63,227
`22,121
`85,348
`
`22,376
`13,197
`88,754
`7,557
`4,220
`136,104
`51,078
`
`92
`1,347
`10,667
`356
`12,462
`199,644
`
`—
`15,257
`21,987
`35,544
`72,788
`21,884
`94,672
`
`—
`
`—
`
`136
`98,634
`23,930
`(67)
`122,633
`207,981
`
`$
`
`134
`95,086
`9,786
`(34)
`104,972
`199,644
`
`S
`
`S
`
`S
`
`S
`
`The accompanying notes are an integral part of these Consolidated Financial Statements.
`
`Source: Destination Maternity Corp, 10~K, 12/13/2013 I Powered by Intelligize
`
`DMC Exhibit 2042_O56
`
`Target v. DMC
`|PR2013-00530, 531, 532, 533
`
`

`
`DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES
`
`CONSOLIDATED STATEMENTS OF INCOME
`
`(in thousands, except per share amounts)
`
`Net sales
`Cost of goods sold
`Gross profit
`Selling, general and administrative expenses
`Store closing, asset impairment and asset disposal expenses
`Other charges
`Operating income
`Interest expense, net
`Loss on extinguisllnlent of debt
`Income before income taxes
`Income tax provision
`Net income
`
`Net income per share—Basic
`Average shares outstanding—Basic
`Net income per share—Diluted
`Average shares outstanding—Di1uted
`
`201 3
`
`Year Ended September 30,
`201 2
`
`20 1 1
`
`$
`
`$
`
`$
`
`$
`
`540,259
`249,298
`290,961
`252,026
`1,441
`—
`37,494
`532
`9
`36,953
`13,010
`23,943
`
`1.80
`13,272
`1.78
`13,439
`
`$
`
`$
`
`$
`
`EB
`
`541,476
`250,765
`290,711
`255,623
`1,983
`—
`33,105
`1,215
`22
`31,868
`12496
`19,372
`
`1.48
`13,096
`1.46
`13,267
`
`545,394
`248,497
`296,897
`257,421
`1,039
`193
`38,244
`2,233
`37
`35,974
`12,986
`22,988
`
`1.79
`12,820
`1.75
`13,120
`
`35
`
`$
`
`$
`
`$
`
`The accompanying notes are an integral part of these Consolidated Financial Statements.
`
`Source: Destination Maternity Corp, 10~K, 12/13i2013 | Powered by Intelligize
`
`DMC Exhibit 2042_O57
`
`Target v. DMC
`|PR2013-00530, 531, 532, 533
`
`

`
`DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES
`
`CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
`
`(in thousands)
`
`Net income
`Foreign currency translation adjustments
`Change in fair value of interest rate swap, net of tax
`Comprehensive income
`
`2 0 1 3
`
`Year Ended September 30,
`2 0 1 2
`
`2 0 1 1
`
`$
`
`$
`
`23,943
`(33)
`—
`23,910
`
`$
`
`$
`
`19,372
`(16)
`90
`19,446
`
`$
`
`$
`
`22,988
`(18)
`490
`23,460
`
`The accompanying notes are an integral part of these Consolidated Financial Statements.
`
`Source: Destination Maternity Corp, 10—K, 12/13/2013 | Powered by Intelligize
`
`DMC Exhibit 2042_O58
`
`Target v. DMC
`|PR2013-00530, 531, 532, 533
`
`

`
`DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES
`
`CONSOI,Il)ATED STATEMENTS OF STOCKHOLDERS’ EQUITY
`
`(in thousands)
`
`Comma“ St°“k
`Number
`of
`Shares
`
`Amount
`
`Additional
`Paid-in
`Capital
`
`Accumulated
`Retained
`Other
`Earnings
`(Accumulated Comprehensive
`Deficit)
`Loss
`
`Total
`
`Balance as of September 30, 2010
`Net income
`Change in fair value of interest rate swap, net of tax
`Foreign currency translation adjustments
`Cash dividends
`Stocl<—based compensation
`Exercise of stock options, net
`Excess tax benefit from stock option exercises and
`restricted stock vesting
`Rcpurchasc and rctircmcnt of common stock
`Balance as of September 30, 2011
`Net income
`
`Change in fair value of interest rate swap, net of tax
`Foreign currency translation adjustments
`Cash dividends
`Stocl<—based compensation
`Exercise of stock options, net
`Excess tax benefit from stock option exercises and
`restricted stock vesting
`Rcpurchasc and rctircmcnt of common stock
`Balance as of September 30, 2012
`Net income
`Foreign currency translation adjustments
`Cash dividends
`Stock-based compensation
`Exercise of stock options, net
`Excess tax benefit from stock option exercises and
`restricted stock vesting
`Repurchase and retirement of common stock
`Balance as of September 30, 2013
`
`12,691
`—
`—
`—
`—
`117
`547
`
`—
`(129)
`13,226
`—
`
`—
`—
`
`91
`84
`
`—
`(31)
`13,370
`—
`—
`—
`97
`1Z5
`
`—
`(34)
`13,556
`
`S
`
`S
`
`127
`—
`—
`—
`—
`1
`5
`
`—
`(1)
`132
`—
`
`—
`—
`
`1
`1
`
`—
`—
`134
`—
`—
`—
`1
`1
`
`—
`—
`136
`
`$
`
`$
`
`88,399
`—
`—
`—
`—
`2.343
`2,280
`
`2,695
`(2,785)
`92,932
`—
`
`—
`—
`
`2.356
`106
`
`289
`(597)
`95,086
`—
`—
`—
`2,770
`743
`
`760
`(725)
`98,634
`
`$
`
`$
`
`S
`
`(16,348)
`22,988
`—
`—
`(6,901)
`
`—
`
`—
`—
`(261)
`19,372
`
`—
`—
`(9,325)
`
`—
`
`—
`—
`9,786
`23,943
`—
`(9,799)
`—
`—
`
`—
`—
`23,930
`
`S
`
`(580)
`—
`490
`(18)
`—
`
`—
`
`—
`—
`(108)
`—
`
`90
`(16)
`
`—
`
`—
`—
`(34)
`—
`(33)
`—
`—
`—
`
`—
`—
`(67)
`
`$
`
`$
`
`71,598
`22,988
`490
`(18)
`(6,901)
`2,344
`2,285
`
`2,695
`(2,786)
`92,695
`19,372
`
`90
`(16)
`(9,325)
`2,357
`107
`
`289
`(597)
`104,972
`23,943
`(33)
`(9,799)
`2,771
`744
`
`760
`(725)
`122,633
`
`The accompanying notes are an integral part of these Consolidated Financial Statements.
`
`Source: Destination Maternity Corp, 10~K, 12/13/2013 I Powered by Intelligize
`
`DMC Exhibit 2042_O59
`
`Target v. DMC
`|PR2013-00530, 531, 532, 533
`
`

`
`DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES
`
`CONSOLIDATED STATEMENTS OF CASH FLOVVS
`
`(in thousands)
`
`Operating Activities
`Net income
`Adjustments to reconcile net income to net cash provided by operating activities:
`Depreciation and amortization
`Stock-based compensation expense
`Loss on impairment of long-lived assets
`Loss on disposal of assets
`Loss on extinguishment of debt
`Deferred income tax (benefit) provision
`Amortization of deferred financing costs
`Changes in assets and liabilities:
`Dccrcasc (increase) in:
`Trade rcccivablcs
`lnvcntorics
`Prepaid expenses a11d other current assets
`Other non-current assets
`Increase (decrease) in:
`Accounts payable, accrued expenses and other current liabilities
`Deferred rent and other non-current liabilities
`Net cash provided by operating activities
`Investing Activities
`Capital expenditures
`Additions to intangible assets
`Withdrawal from grantor trust
`Net cash used in investing activities
`Financing Activities
`Increase (decrease) in cash overdrafts
`Repayment of 1ong—te1“m debt
`Deferred financing costs paid
`Withholding taxes on stock-based compensation paid in connection with repurchase ofcommon
`stock
`Cash dividends paid
`Proceeds from exercise of stock options
`Excess tax benefit from exercise of stock options and restricted stock vesting
`Net cash used in financing activitics
`Effect of exchange rate changes on cash and cash equivalents
`Net Increase (Decrease) in Cash and Cash Equivalents
`Cash and Cash Equivalents, Beginning of Year
`Cash and Cash Equivalents, End of Year
`
`Year Ended September 30,
`2012
`
`20 1 3
`
`20 1 1
`
`$
`
`23,943
`
`$
`
`19,372
`
`$
`
`22,988
`
`12,424
`2,771
`786
`528
`9
`(3.007)
`203
`
`727
`2,205
`(2,708)
`(54)
`
`4,058
`268
`42,153
`
`(15,059)
`(963)
`—
`(16,022)
`
`1,278
`(15,257)
`(927)
`
`(725)
`(9,799)
`744
`760
`(23,926)
`(26)
`2,179
`22,376
`24,555
`
`$
`
`12,445
`2,357
`1,876
`115
`22
`(1,378)
`105
`
`(2,188)
`1,611
`2,577
`(12)
`
`6,201
`(406)
`42,697
`
`(9,256)
`(265)
`—
`(9,521)
`
`(401)
`(16,085)
`(61)
`
`(597)
`(9,325)
`107
`289
`(26,073)
`(12)
`7,091
`15,285
`22,376
`
`$
`
`12,769
`2,344
`768
`270
`37
`2,679
`170
`
`(680)
`(9,632)
`(1,634)
`(26)
`
`(5,525)
`(3,085)
`21,443
`
`(12,270)
`(313)
`1,504
`(11,079)
`
`(1,147)
`(13,819)
`(26)
`
`(2,786)
`(6,901)
`2,285
`2,695
`(19,699)
`(13)
`(9,348)
`24,633
`15,285
`
`$
`
`The accompanying notes are an integral part of these Consolidated 1-'inancia1 Statcmcnts.
`
`Seurce: Destination Maternity Corp, 10~K, 12/13/2013 I Powered by Intelligize
`
`DMC Exhibit 2042_O60
`
`Target v. DMC
`|PR2013-00530, 531, 532, 533
`
`

`
`DESTINATION l\/LATERNITY CORPORATION AND SUBSIDIARIES
`NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
`
`1.
`
`NATURE OF BUSIl\ESS
`
`Destination Maternity Corporation and subsidiaries (the “Company”) is a specialty designer and retailer of maternity clothing. The Company
`operated 1,907 retail locations as of September 30, 2013, including 596 stores and 1,311 leased departments, throughout the United States, Puerto
`Rico and Canada. and markets its maternity apparel on the Internet through its DestinationMaternity.com and brand-specific websites. The
`Company also markets maternity apparel at Kohl’s® stores througlrout tl1e United States under an exclusive product and license agreement. F11rtl1er
`the Company has store franchise and product supply relationships in the Middle East, South Korea and India. The Company was incorporated in
`Delaware in 1982.
`
`2.
`
`SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
`
`a.
`
`Principles of Cansalitlatinn and Basis of Financial Statement Presentation
`
`The accompanying consolidated financial statements include the accounts of the Company and its direct and indirect wholly—owned
`subsidiaries: Cave Springs, lnc., Mothers Work Canada, Inc., Destination Maternity Apparel Private Limited and Mothers \X7orl< Services, Inc. All
`significant intercompany transactions and accounts have been eliminated in consolidation.
`
`b.
`
`Fiscal Year-End
`
`The Company operates on a fiscal year ending September 30 ofeaeh 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.
`
`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 ofassets and liabilities and disclosure of contingent
`assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual
`results could differ from those estimates.
`
`d.
`
`Cash and Cash Equivalents
`
`Cash and cash equivalents include cash on hand, cash in the bank and short—term investments with an original maturity of three months or
`less when purchased. Book cash overdratts, 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 Co111pa11y r11air1tai11s cash accounts that, at times, may exceed federally insured lir11its. The Company has r1ot experienced any losses frorI1
`maintaining cash accounts in excess of such limits. Management believes that it is not exposed to any significant credit risks on its cash accounts.
`
`e.
`
`Inventories
`
`Inventories are valued at the lower of cost or market. Cost is determined by the “first-in, first-out” (FIFO) method. Inventories of goods
`manufactured by the Company include the cost of materials, freight, direct labor, and manufacturing and distribution overhead.
`
`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 useful life. The cost of assets sold or retired
`and thc rclatcd accumulated dcprcciation or amortization arc rcmovcd from thc accounts with airy rcsulting gain or loss includcd i11 nct incomc.
`Maintenance and repairs are expensed as incurred, except for the capitalization ofmajor renewals and betterrnents that extend tl1e life ofthe 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, m anagem ent’s plans for future operations, brand
`initiatives, recent operating results and projected cash flows. If the associated undiscounted cash flows are insufficient to support the recorded
`assct, an impairment loss is recognized to rcducc the carrying value of thc assct. 'l'hc 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.
`
`F-8
`
`Source: Destination Maternity Corp, 10—K, 12/13/2013 | Powered by Intelligize
`
`
`
`DMC Exhibit 2042_O61
`
`Target v. DMC
`|PR2013-00530, 531, 532, 533
`
`

`
`DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES
`
`NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
`
`2.
`
`SUMMARY OF SIGNIFICANT ACCOLNTING POLICIES (Continued)
`
`,5}.
`
`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.
`lntangiblc assets are amortizcd ovcr thc shortcr of their uscful life or, if applicablc, thc lcasc tcrm. Management rcvicws the carrying amount of
`these intangible assets as impairment indicators arise, to assess the continued recoverability based on future undiscounted cash [lows and
`operating results from the related asset, future asset utilization and changes in market conditions. During fiscal 2013 tl1e Company capitalized
`Sl,093,000 oflegal costs incurred in connection with a lawsuit asserting infringement ofCompany patents. During fiscal 2013, 2012 and 201 l, the
`Company recorded write-downs of intangible assets totaling $32,000, $1,000 and $9,000, respectively, on a pretax basis. The Company has not
`idcntificd any indefinite-lived intangiblc asscts. Aggrcgatc amortization cxpcnsc of intangiblc asscts in fiscal 2013, 2012 and 2011 was $149,000,
`Sl42,000 and $135,000, respectively.
`
`Estimated amortization expense of tl1e Company’s intangible assets as of September 30, 2013, for the next five fiscal years, is as follows (i11
`thousands):
`
`Fis cal Y ea r
`2014
`2015
`2016
`2017
`2018
`
`/2.
`
`Interest Rate Derivatives
`
`$
`
`198
`180
`175
`168
`163
`
`The Company mitigated a portion of its floating rate interest risk on variable rate long-term debt through an interest rate swap agreement that
`expired on April 18, 2012. On the date the derivative instrument was entered into, the Company designated it as a hedge of the variability of cash
`flows to be received or paid related to a recognized asset or liability (“cash flow hedge”) a11d recognized tl1e derivative on tl1e 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,
`a11d 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 and hedged items.
`The Company formally assessed at t11e inception of the hedge and on a quarterly basis, whether the derivative was highly effective in offsetting
`changes in cash [lows of the hedged item. For fiscal 2012 and 2011, tl1e Company’s interest rate swap was determined to have no ineffectiveness.
`
`i.
`
`Deferred Financing Costs
`
`Deferred financing costs are amortized to interest expense over the term of the related debt agreement. Amorti7ation 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 a11d 2011 thc Company wrotc otf $9,000, $22,000 and $37,000, rcspcctivcly, ofunamortizcd dcfcrrcd financing costs (scc .\Iotc 9). In
`connection with its current credit facility entered into on November 1, 2012, the Company incurred approximately $988,000 i11 deferred financing
`costs, of which $927,000 was paid in fiscal 2013 and $61,000 was paid in fiscal 2012 (see Note 8).
`
`Estimated amortization expense of the Company’s deferred financing costs as of September 30, 2013 is as follows (in thousands):
`
`Fiscal Year
`2014
`2015
`2016
`2017
`2018
`
`$
`
`198
`198
`198
`198
`15
`
`Source: Destination Maternity Corp, 102K, 12/13/2013 I Powered by Intetligize
`
`DMC Exhibit 2042_O62
`
`Target v. DMC
`|PR2013-00530, 531, 532, 533
`
`

`
`DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES
`
`NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
`
`2.
`
`SUMMARY OF SIGNIFICANT ACCOLNTING POLICIES (Continued)
`
`j.
`
`Deferred Rent
`
`Rent expense on operating leases, including rent holidays a11d scheduled rent increases, is recorded on a straight-line basis over the term of
`the lease commencing on the date the Company takes possession of the leased property, which is generally four to six weeks prior to a store’s
`opening date. The net excess of rent expense over the actual cash paid has been recorded as a deferred rent liability in the accompanying
`Consolidated Balance Sheets. Tenant improvement allowances received fi'o1n landlords are also included in the accompanying Consolidated
`Balance Sheets as deferred rent liabilities and are amortized as a reduction of rent expense over the term of the lease from the possession date.
`
`k.
`
`Treasutjy (Reacquired) Shares
`
`Shares repurchased are retired and treated as authorized but unissued shares, with the cost in excess of par value of the reacquired shares
`charged to additional paid-in capital and the par value charged to common stock.
`
`l
`
`Fair Value of Financial Instruments
`
`The carrying values of cash and cash equivalents, trade receivables a11d accounts payable approximate fair value due to the short—term nature
`ofthose instruments. The majority ofthe Company's long-term 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 i11terest 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.
`
`m
`
`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 crcdits issued. The liability is relieved and revenue is recognized when gift cards or mcrchandise
`credits are redeemed by customers as tender for merchandise purchased. Allowances for returns are recorded as a redLictio11 of revenue, based on
`the Company’s historical experience. Revenues are recorded net of applicable sales taxes.
`
`11.
`
`Other Revenues
`
`Included in net sales are revenues earned by the Company through a variety of marketing partnership programs utilizing the Company’s opt-
`in customer database and various in-store marketing initiatives. focused on baby and parent-related products and services. 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. lntemational 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 and royalties are earned based on net sales of the Company’s
`international franchisees and may include minimum guaranteed royalties.
`
`0.
`
`Cast of Goods Sold
`
`Cost of goods sold in the accompanying Consolidated Statements of Income 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 tl1e Compa11y’s buying departments), inventory reserves (including lower of cost or market reseiyes), inbound fieight
`charges, purchasing and receiving costs, inspection costs, warehousing costs, internal transfer costs, and the other costs of the Company’s
`distribution network.
`
`1).
`
`Shipping and Handling Fees and Costs
`
`The Company includes shipping and handling revenue earned from its lntemet activities in net sales. Shipping and handling costs, which are
`included i11 cost of goods sold in the accompanying Consolidated Statements of lncome, include shipping supplies, related labor costs a11d third-
`party shipping costs.
`
`F-10
`
`Source: Destination Maternity Corp, 10—K, 12/13/2013 | Powered by Intelligize
`
`
`
`DMC Exhibit 2042_063
`
`Target v. DMC
`|PR2013-00530, 531, 532, 533
`
`

`
`DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES
`
`NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
`
`2.
`
`SUMMARY OF SIGNIFICANT ACCOLNTING POLICIES (Continued)
`
`q.
`
`Selling, General and Administrative Expenses
`
`Selling, general and administrative expenses in the accompanying Consolidated Statements of Income include advertising and marketing
`expenses, corporate administrative expenses, store expenses (including store payroll a11d store occupancy expenses), and store opening expenses.
`
`r.
`
`Advertising Costs
`
`The Company expenses the costs of advertising wh en the advertising first occurs. Advertising expenses, including Internet advertising
`expenses, were $16,984,000, $13,878,000 and $11,712,000 in fiscal 2013, 2012 and 2011, respectively.
`
`s.
`
`Stock-based Compensation
`
`The Company recognizes employee stock-based compensation as a cost in the accompanying Consolidated Statements of Income. Stock-
`based awards are measured at the grant date fair value and are recorded generally on a straight—line basis over the vesting period, net of estimated
`forfeitures. Excess tax benefits related to stock option exercises and restricted stock vesting, which are recognized in stockholders’ equity, are
`refiected as financing cash inflows.
`
`t.
`
`Store Closing, Asset Impairment and Asset Disposal Expenses
`
`Store closing expenses include lease termination fees, gains or losses on disposal of closed store assets and recognition of unamortized
`deferred rent. Asset impairment expenses represent losses recognized to reduce the carrying value of impaired long-lived assets. Asset disposal
`expenses represent gains or losses o11 disposal ofassets other than i11 connection with store closings, including assets disposed from remodeling
`or relocation of stores.
`
`ll.
`
`Income Taxes
`
`The Company utilizes the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are
`recognized for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and
`liabilities as well as from net operating loss cairyforwards. The effect o11 defeired tax assets and liabilities of a change in tax rates is recognized in
`operations in the period that includes the enactment date.
`
`Under the accounting standard for uncertain income tax positions, recognition of a tax benefit occurs when a tax position is estimated by
`management to be more likely than not to be sustained upon examination, based solely on its technical merits. Derecognition of a previously
`recognized tax position would occur ifit is subsequently determined that the tax position no longer meets the more-likely-than-not threshold of
`being sustained. Recognized tax positions are measured at the largest amount that management believes has a greater than 50% likelihood of being
`finalized. The Company records interest and penalties related to unrecognized tax benefits in income tax provision.
`
`v.
`
`Net Income per Share and Cash Dividends
`
`Basic net income (or earnings) per share (“Basic EPS”) is computed by dividing net income by the weighted average number of common
`shares outstanding, excluding restricted stock awards for which the restrictions have not lapsed. Diluted net income per share (“Diluted EPS”) is
`computed by dividing net income by the weighted average number of common shares outstanding, after giving effect to the potential dilution, if
`applicable, fiom the assnrned lapse of restrictions o11 restricted stock awards and exercise of stock options into shares of con11non stock as if those
`stock options were exercised. Common shares issuable in connection with the award of performance—based restricted stock units (“RSUs”) are
`excluded from the calculation of EPS until the RSUs’ performance conditions are achieved and the shares in respect of the RSUS become issuable
`(see Note 13).
`
`F-11
`
`Source: Destination Maternity Corp, 10—K, 12/13/2013 | Powered by Intelligize
`
`DMC Exhibit 2042_O64
`
`Target v. DMC
`|PR2013-00530, 531, 532, 533
`
`

`
`DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES
`
`NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
`
`2.
`
`SUMMARY OF SIGNIFICANT ACCOLNTING POLICIES (Continued)
`
`The following table summarizes those effects for the diluted net income per share calculation (in thousands, except per share amounts):
`
`Year Ended September 30,
`2012
`
`2011
`
`2013
`
`Net incom e
`Net income per share—Basic
`Net income per share—Diluted
`Average number of shares outstanding—Basic
`Incremental shares from the assumed exercise of outstanding stock options
`Incremental shares from the assumed lapse of restrictions on restricted stock
`awards
`
`3%
`$
`$
`
`Average number of shares outstanding—Diluted
`
`$
`$
`$
`
`23,943
`1.80
`1.78
`13,272
`108
`
`59
`
`13,439
`
`$
`$
`$
`
`19,372
`1.48
`1.46
`13,096
`122
`
`49
`
`13,267
`
`22,988
`1.79
`1.75
`12.820
`239
`
`61
`
`13,120
`
`In addition to perform ance-based RS1 ls, for fiscal 2013, 201 2 and 201 1, stock options and unvested restricted stock totaling approximately
`196,000, 321,000 and 164,000 shares, respectively, were excluded from the calculation of Diluted EPS as their effect would have been antidilutive.
`
`On January 26, 2011, the Company announced the initiation ofa regular quarterly cash dividend. During fiscal 2013, 2012 and 2011 the
`Company paid casl1 dividends totaling $9.799,000 ($0.725 per share), $9,325.000 ($0.70 per share) and $6.901,000 ($0.525 per share), respectively. On
`November 14, 2013 the Company declared a quarterly cash dividend of $0.1875 per sl1are payable on December 27, 2013, which will require
`approximately $2,600,000 of available cash.
`
`w.
`
`Statements of Cash Flaws
`
`In fiscal 2013, 2012 and 2011, the Company paid interest, including payments made on its interest rate swap agreement (see Note 9), of
`$360,000, $1,359,000 and $2,266,000, respectively. and made income tax payments, net of refunds, of $16,188,000, $7,432,000 and $9,804,000,
`respectively.
`
`x.
`
`Business and Credit Risk
`
`Financial instruments, primarily cash and casl1 equivalents a11d trade receivables, potentially subject the Company to concentrations of credit
`risk. The Company limits its credit risk associated with cash and cash equivalents by placing such investments in highly liquid fiinds and
`instruments. Trade receivables associated with third-party credit cards are processed by financial institutions, which are monitored for financial
`stability. Trade receivables associated with licensed brand, leased departnient, i11ternatio11al franchise a11d other relatioiiships are evaluated for
`collectibility based on a combination of factors, including aging of trade receivables, write—off experience and past payment trends. The Company is
`dependent on key suppliers to provide sufficient quantities of inventory at competitive prices. No single supplier represented 10% or more of net
`purchases in fiscal 2013, 2012 or 2011. A significant majority of the Company’s purchases during fiscal 2013, 2012 and 2011 were imported.
`Management believes that any event causing a disruption of imports from any specific country could be mitigated by moving production to readily
`available alteinative sources.
`
`y.
`
`Insurance
`
`The Company is self-insured for workers’ compensation, general liability and automotive liability claims, and employee-related healtlicare
`claims, up to certain stop-loss limits. Such costs are accrued based on known claims and an estimate of incurred but not reported claims. Further,
`the Company utilizes a cooperative arrangement with a number of other companies to assist in managing ccrtai11 workers’ compensation and
`general liability insurance risks for loss occurrences prior to March 1, 2010. 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.
`
`F-12
`
`Source: Destination Maternity Corp, 109K, 12/13/2013 I Powered by Intelligize
`
`
`
`DMC Exhibit 2042_O65
`
`Target v. DMC
`|PR2013-00530, 531, 532, 533
`
`

`
`DESTINATION MATERNITY CORPORATION AND SUBSIDIARIES
`
`NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
`
`2.
`
`SUMMARY OF SIGNIFICANT ACCOLNTI