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EXCEL - IDEA: XBRL DOCUMENT - Neiman Marcus Group LTD LLCFinancial_Report.xls
EX-32.1 - EXHIBIT 32.1 - Neiman Marcus Group LTD LLCexhibit321-q3fy15.htm
EX-31.2 - EXHIBIT 31.2 - Neiman Marcus Group LTD LLCexhibit312-q3fy15.htm
EX-31.1 - EXHIBIT 31.1 - Neiman Marcus Group LTD LLCexhibit311-q3fy15.htm

 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549 
FORM 10-Q
 
ý      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended May 2, 2015
 
OR
 
o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from              to            
 
Commission file no. 333-133184-12
 
Neiman Marcus Group LTD LLC
(Exact name of registrant as specified in its charter) 
Delaware
20-3509435
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
1618 Main Street
Dallas, Texas
75201
(Address of principal executive offices)
(Zip code)
Registrant’s telephone number, including area code: (214) 743-7600
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes o  No ý
(Note: The registrant is a voluntary filer and not subject to the filing requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934. Although not subject to these filing requirements, the registrant has filed all reports that would have been required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months had the registrant been subject to such requirements.)
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes ý  No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
Accelerated filer o
 
 
Non-accelerated filer x
Smaller reporting company o
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes o  No ý

 
 
 
 
 



NEIMAN MARCUS GROUP LTD LLC
 
INDEX
 
 
 
 
Page
Part I.
Financial Information
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Part II.
Other Information
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




NEIMAN MARCUS GROUP LTD LLC
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
 
 
 
May 2,
2015
 
August 2,
2014
 
May 3,
2014
(in thousands, except units)
 
(Successor)
 
(Successor)
 
(Successor)
ASSETS
 
 

 
 

 
 

Current assets:
 
 

 
 

 
 

Cash and cash equivalents
 
$
82,211

 
$
196,476

 
$
115,818

Merchandise inventories
 
1,173,262

 
1,069,632

 
1,053,450

Deferred income taxes
 
33,883

 
39,049

 
41,340

Other current assets
 
108,507

 
104,617

 
147,370

Total current assets
 
1,397,863

 
1,409,774

 
1,357,978

 
 
 
 
 
 
 
Property and equipment, net
 
1,439,657

 
1,390,266

 
1,363,521

Intangible assets, net
 
3,625,450

 
3,652,984

 
3,702,526

Goodwill
 
2,267,897

 
2,148,627

 
2,148,627

Other assets
 
140,578

 
160,075

 
167,570

Total assets
 
$
8,871,445

 
$
8,761,726

 
$
8,740,222

 
 
 
 
 
 
 
LIABILITIES AND MEMBER EQUITY
 
 

 
 

 
 

Current liabilities:
 
 

 
 

 
 

Accounts payable
 
$
280,285

 
$
375,085

 
$
261,928

Accrued liabilities
 
457,504

 
452,172

 
438,906

Current portion of long-term debt
 
29,426

 
29,426

 
29,426

Total current liabilities
 
767,215

 
856,683

 
730,260

 
 
 
 
 
 
 
Long-term liabilities:
 
 

 
 

 
 

Long-term debt
 
4,708,612

 
4,580,521

 
4,632,824

Deferred income taxes
 
1,500,914

 
1,540,076

 
1,566,554

Other long-term liabilities
 
439,994

 
351,852

 
319,052

Total long-term liabilities
 
6,649,520

 
6,472,449

 
6,518,430

 
 
 
 
 
 
 
Membership unit (1 unit issued and outstanding at May 2, 2015, August 2, 2014 and May 3, 2014)
 

 

 

Member capital
 
1,584,106

 
1,584,106

 
1,583,256

Accumulated other comprehensive (loss) earnings
 
(43,144
)
 
(17,429
)
 
303

Accumulated deficit
 
(86,252
)
 
(134,083
)
 
(92,027
)
Total member equity
 
1,454,710

 
1,432,594

 
1,491,532

Total liabilities and member equity
 
$
8,871,445

 
$
8,761,726

 
$
8,740,222

 
See Notes to Condensed Consolidated Financial Statements.


1


NEIMAN MARCUS GROUP LTD LLC
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
 
 
 
Thirteen weeks ended
 
 
May 2,
2015
 
May 3,
2014
(in thousands)
 
(Successor)
 
(Successor)
 
 
 
 
 
Revenues
 
$
1,220,100

 
$
1,164,720

Cost of goods sold including buying and occupancy costs (excluding depreciation)
 
755,034

 
748,961

Selling, general and administrative expenses (excluding depreciation)
 
285,689

 
271,430

Income from credit card program
 
(11,899
)
 
(13,222
)
Depreciation expense
 
48,070

 
36,639

Amortization of intangible assets
 
16,035

 
36,017

Amortization of favorable lease commitments
 
13,640

 
13,525

Other expenses
 
5,571

 
8,418

 
 
 
 
 
Operating earnings
 
107,960

 
62,952

 
 
 
 
 
Interest expense, net
 
72,844

 
82,222

 
 
 
 
 
Earnings (loss) before income taxes
 
35,116

 
(19,270
)
 
 
 
 
 
Income tax expense (benefit)
 
15,296

 
(11,266
)
 
 
 
 
 
Net earnings (loss)
 
$
19,820

 
$
(8,004
)

See Notes to Condensed Consolidated Financial Statements.




2


NEIMAN MARCUS GROUP LTD LLC
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

 
 
Thirty-nine
weeks ended
 
Twenty-six
weeks ended
 
 
Thirteen
weeks ended
 
 
May 2,
2015
 
May 3,
2014
 
 
November 2,
2013
(in thousands)
 
(Successor)
 
(Successor)
 
 
(Predecessor)
 
 
 
 
 
 
 
 
Revenues
 
$
3,928,416

 
$
2,597,513

 
 
$
1,129,138

Cost of goods sold including buying and occupancy costs (excluding depreciation)
 
2,502,553

 
1,801,885

 
 
685,408

Selling, general and administrative expenses (excluding depreciation)
 
894,666

 
575,995

 
 
266,388

Income from credit card program
 
(40,752
)
 
(28,451
)
 
 
(14,653
)
Depreciation expense
 
136,590

 
73,331

 
 
34,239

Amortization of intangible assets
 
66,764

 
72,034

 
 
7,251

Amortization of favorable lease commitments
 
40,675

 
27,050

 
 
4,469

Other expenses
 
28,080

 
74,008

 
 
113,900

 
 
 
 
 
 
 
 
Operating earnings
 
299,840

 
1,661

 
 
32,136

 
 
 
 
 
 
 
 
Interest expense, net
 
217,919

 
160,081

 
 
37,315

 
 
 
 
 
 
 
 
Earnings (loss) before income taxes
 
81,921

 
(158,420
)
 
 
(5,179
)
 
 
 
 
 
 
 
 
Income tax expense (benefit)
 
34,090

 
(66,393
)
 
 
7,919

 
 
 
 
 
 
 
 
Net earnings (loss)
 
$
47,831

 
$
(92,027
)
 
 
$
(13,098
)

See Notes to Condensed Consolidated Financial Statements.


3


NEIMAN MARCUS GROUP LTD LLC
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS (LOSS)
(UNAUDITED)
 
 
 
Thirteen weeks ended
 
 
May 2,
2015
 
May 3,
2014
(in thousands)
 
(Successor)
 
(Successor)
 
 
 
 
 
Net earnings (loss)
 
$
19,820

 
$
(8,004
)
 
 
 
 
 
Other comprehensive (loss) earnings:
 
 

 
 

Foreign currency translation adjustments, net of tax
 
(15,707
)
 

Change in unrealized loss on financial instruments, net of tax
 
925

 
588

Change in unrealized loss on unfunded benefit obligations, net of tax
 
(57
)
 

Total other comprehensive (loss) earnings
 
(14,839
)
 
588

 
 
 
 
 
Total comprehensive earnings (loss)
 
$
4,981

 
$
(7,416
)
 
See Notes to Condensed Consolidated Financial Statements.


4


NEIMAN MARCUS GROUP LTD LLC
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS (LOSS)
(UNAUDITED)

 
 
Thirty-nine
weeks ended
 
Twenty-six
weeks ended
 
 
Thirteen
weeks ended
 
 
May 2,
2015
 
May 3,
2014
 
 
November 2,
2013
(in thousands)
 
(Successor)
 
(Successor)
 
 
(Predecessor)
 
 
 
 
 
 
 
 
Net earnings (loss)
 
$
47,831

 
$
(92,027
)
 
 
$
(13,098
)
 
 
 
 
 
 
 
 
Other comprehensive (loss) earnings:
 
 

 
 
 
 
 

Foreign currency translation adjustments, net of tax
 
(21,684
)
 

 
 

Change in unrealized loss on financial instruments, net of tax
 
(2,007
)
 
303

 
 
610

Reclassification of realized loss on financial instruments to earnings, net of tax
 

 

 
 
224

Change in unrealized loss on unfunded benefit obligations, net of tax
 
(2,024
)
 

 
 
490

Total other comprehensive (loss) earnings
 
(25,715
)
 
303

 
 
1,324

 
 
 
 
 
 
 
 
Total comprehensive earnings (loss)
 
$
22,116

 
$
(91,724
)
 
 
$
(11,774
)
 
See Notes to Condensed Consolidated Financial Statements.


5


NEIMAN MARCUS GROUP LTD LLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
 
Thirty-nine
weeks ended
 
Acquisition and
Twenty-six
weeks ended
 
 
Thirteen
weeks ended
 
 
May 2,
2015
 
May 3,
2014
 
 
November 2,
2013
(in thousands)
 
(Successor)
 
(Successor)
 
 
(Predecessor)
CASH FLOWS - OPERATING ACTIVITIES
 
 

 
 

 
 
 

Net earnings (loss)
 
$
47,831

 
$
(92,027
)
 
 
$
(13,098
)
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:
 
 

 
 

 
 
 

Depreciation and amortization expense
 
262,446

 
183,405

 
 
48,425

Loss on debt extinguishment
 

 
7,882

 
 

Deferred income taxes
 
(49,207
)
 
(119,637
)
 
 
(6,326
)
Non-cash charges related to acquisitions
 
10,159

 
145,062

 
 

Other
 
8,417

 
4,235

 
 
6,525

 
 
279,646

 
128,920

 
 
35,526

Changes in operating assets and liabilities, excluding net assets acquired:
 
 

 
 

 
 
 

Merchandise inventories
 
(72,215
)
 
105,014

 
 
(142,417
)
Other current assets
 
141

 
46,556

 
 
12,111

Other assets
 
378

 
3,226

 
 
(1,484
)
Accounts payable and accrued liabilities
 
(115,235
)
 
(178,840
)
 
 
107,091

Deferred real estate credits
 
30,098

 
589

 
 
1,484

Payment of deferred compensation in connection with the Acquisition
 

 
(16,623
)
 
 

Net cash provided by operating activities
 
122,813

 
88,842

 
 
12,311

 
 
 
 
 
 
 
 
CASH FLOWS - INVESTING ACTIVITIES
 
 

 
 

 
 
 

Capital expenditures
 
(183,016
)
 
(75,629
)
 
 
(35,959
)
Acquisition of Neiman Marcus Group LTD LLC
 

 
(3,388,585
)
 
 

Acquisition of MyTheresa
 
(181,727
)
 

 
 

Proceeds from sale of foreign e-commerce retailer
 

 
35,000

 
 

Net cash used for investing activities
 
(364,743
)
 
(3,429,214
)
 
 
(35,959
)
 
 
 
 
 
 
 
 
CASH FLOWS - FINANCING ACTIVITIES
 
 

 
 

 
 
 

Borrowings under senior secured asset-based revolving credit facility
 
480,000

 
170,000

 
 

Repayment of borrowings under senior secured asset-based revolving credit facility
 
(330,000
)
 
(125,000
)
 
 

Borrowings under senior secured term loan facility
 

 
2,950,000

 
 

Repayment of borrowings under senior secured term loan facility
 
(22,070
)
 
(14,732
)
 
 

Borrowings under former senior secured asset-based revolving credit facility
 

 

 
 
130,000

Repayment of borrowings under former senior secured asset-based revolving credit facility
 

 
(145,000
)
 
 

Repayment of borrowings under former senior secured term loan facility
 

 
(2,433,096
)
 
 
(126,904
)
Borrowings under cash pay notes
 

 
960,000

 
 

Borrowings under PIK toggle notes
 

 
600,000

 
 

Debt issuance costs paid
 
(265
)
 
(178,606
)
 
 

Cash equity contributions
 

 
1,556,500

 
 

Net cash provided by financing activities
 
127,665

 
3,340,066

 
 
3,096

 
 
 
 
 
 
 
 
CASH AND CASH EQUIVALENTS
 
 

 
 

 
 
 

Decrease during the period
 
(114,265
)
 
(306
)
 
 
(20,552
)
Beginning balance
 
196,476

 
116,124

 
 
136,676

Ending balance
 
$
82,211

 
$
115,818

 
 
$
116,124

 
 
 
 
 
 
 
 
Supplemental Schedule of Cash Flow Information
 
 

 
 

 
 
 

Cash paid during the period for:
 
 

 
 

 
 
 

Interest
 
$
230,751

 
$
124,809

 
 
$
40,789

Income taxes
 
$
58,416

 
$
36,415

 
 
$
7,544

Non-cash activities:
 
 

 
 

 
 
 

Equity contribution from management
 
$

 
$
26,756

 
 
$

Contingent earn-out obligation incurred in connection with acquisition of MyTheresa
 
$
50,043

 
$

 
 
$

See Notes to Condensed Consolidated Financial Statements.

6


NEIMAN MARCUS GROUP LTD LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
1.              Basis of Presentation
 
Neiman Marcus Group LTD LLC (the Company) is a luxury retailer conducting operations principally under the Neiman Marcus, Bergdorf Goodman and MyTheresa brand names.  References to “we,” “our” and “us” are used to refer to the Company or collectively to the Company and its subsidiaries, as appropriate to the context.  On October 25, 2013, the Company merged with and into Mariposa Merger Sub LLC (Mariposa) pursuant to an Agreement and Plan of Merger, dated September 9, 2013, by and among Neiman Marcus Group, Inc. (f/k/a NM Mariposa Holdings, Inc.) (Parent), Mariposa and the Company, with the Company surviving the merger (the Acquisition).  As a result of the Acquisition and the Conversion (as defined below), the Company is now a direct subsidiary of Mariposa Intermediate Holdings LLC (Holdings), which in turn is a direct subsidiary of Parent. Parent is owned by funds affiliated with Ares Management, L.P. and Canada Pension Plan Investment Board (together, the Sponsors) and certain co-investors.  On October 28, 2013, the Company and NMG (as defined below) each converted from a Delaware corporation to a Delaware limited liability company (the Conversion). Previously, the Company was a subsidiary of Newton Holding, LLC, which was controlled by investment funds affiliated with TPG Global, LLC (collectively with its affiliates, TPG) and Warburg Pincus LLC (together with TPG, the Former Sponsors). 
 
The Company’s operations are conducted through its direct wholly owned subsidiary, The Neiman Marcus Group LLC (NMG).

The accompanying Condensed Consolidated Financial Statements are presented as “Predecessor” or “Successor” to indicate whether they relate to the period preceding the Acquisition or the period succeeding the Acquisition, respectively.  All significant intercompany accounts and transactions have been eliminated.

Our fiscal year ends on the Saturday closest to July 31.  Like many other retailers, we follow a 4-5-4 reporting calendar, which means that each fiscal quarter consists of thirteen weeks divided into periods of four weeks, five weeks and four weeks.  All references to (i) the third quarter of fiscal year 2015 relate to the thirteen weeks ended May 2, 2015, (ii) the third quarter of fiscal year 2014 relate to the thirteen weeks ended May 3, 2014, (iii) year-to-date fiscal 2015 relate to the thirty-nine weeks ended May 2, 2015 and (iv) year-to-date fiscal 2014 relate to the thirty-nine weeks ended May 3, 2014 (consisting of the twenty-six weeks ended May 3, 2014 of the Successor and the thirteen weeks ended November 2, 2013 of the Predecessor).
 
We have prepared the accompanying Condensed Consolidated Financial Statements in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and Rule 10-01 of Regulation S-X of the Securities Act of 1933, as amended.  Accordingly, these financial statements do not include all of the information and footnotes required by GAAP for complete financial statements.  Therefore, these financial statements should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended August 2, 2014.  In our opinion, the accompanying Condensed Consolidated Financial Statements contain all adjustments, consisting of normal recurring adjustments, necessary to present fairly our financial position, results of operations and cash flows for the applicable interim periods.
 
The luxury retail industry is seasonal in nature, with higher sales typically generated in the fall and holiday selling seasons.  Due to seasonal and other factors, the results of operations for the third quarter of fiscal year 2015 are not necessarily comparable to, or indicative of, results of any other interim period or for the fiscal year as a whole.
 
A detailed description of our critical accounting policies is included in our Annual Report on Form 10-K for the fiscal year ended August 2, 2014.

Certain prior period balances have been reclassified to conform to the current period presentation.

Use of Estimates.  We are required to make estimates and assumptions about future events in preparing our financial statements in conformity with GAAP.  These estimates and assumptions affect the amounts of assets, liabilities, revenues and expenses and the disclosure of gain and loss contingencies at the date of the accompanying Condensed Consolidated Financial Statements.
 
While we believe that our past estimates and assumptions have been materially accurate, the amounts currently estimated are subject to change if different assumptions as to the outcome of future events were made.  We evaluate our estimates and assumptions on an ongoing basis and predicate those estimates and assumptions on historical experience and on various other factors that we believe are reasonable under the circumstances.  We make adjustments to our estimates and assumptions when facts and circumstances

7


dictate.  Since future events and their effects cannot be determined with absolute certainty, actual results may differ from the estimates and assumptions used in preparing the accompanying Condensed Consolidated Financial Statements.

We believe the following critical accounting policies, among others, encompass the more significant estimates, assumptions and judgments used in the preparation of the accompanying Condensed Consolidated Financial Statements:

allocation of the price paid to acquire the Company and MyTheresa (as described below) to our assets and liabilities as of the acquisition dates (as more fully described in Notes 2 and 3); 
recognition of revenues;
valuation of merchandise inventories, including determination of original retail values, recognition of markdowns and vendor allowances, estimation of inventory shrinkage and determination of cost of goods sold;
determination of impairment of long-lived assets;
measurement of liabilities related to our loyalty program;
recognition of income taxes; and
measurement of accruals for general liability, workers’ compensation and health insurance claims and pension and postretirement health care benefits.
Segments. We believe that our customers have allocated a higher portion of their luxury spending to online retailing in recent years and that our customers increasingly expect a seamless shopping experience across our in-store and online channels, and we expect these trends to continue for the foreseeable future. As a result, we have made investments and redesigned processes to integrate our shopping experience across channels so that it is consistent with our customers' shopping preferences and expectations. In particular, we have invested and continue to invest in technology and systems that further our omni-channel retailing capabilities, and in fiscal year 2014, we realigned the management and merchandising responsibilities for our Neiman Marcus brand on an omni-channel basis. With the acceleration of omni-channel retailing and our past and ongoing investments in our omni-channel retail model, we believe the growth in our total comparable revenues and results of operations are the best measures of our ongoing performance. As a result, effective August 3, 2014, we began viewing and reporting our specialty retail stores and online operations as a single, omni-channel reporting segment.
 
Recent Accounting Pronouncements. In May 2014, the Financial Accounting Standards Board (the FASB) issued guidance to clarify the principles for recognizing revenue and to develop a common revenue standard for GAAP and International Financial Reporting Standards. The standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes the most recent revenue recognition guidance. This new guidance is currently anticipated to be effective for us no earlier than the first quarter of fiscal year 2018 using one of two retrospective application methods. We are currently evaluating which application method to adopt and the impact of adopting this new accounting guidance on our Condensed Consolidated Financial Statements.

We do not expect that any other recently issued accounting pronouncements will have a material impact on our Condensed Consolidated Financial Statements.


2.              The Acquisition
 
The Acquisition was completed on October 25, 2013 and was financed by:

borrowings of $75.0 million under our senior secured asset-based revolving credit facility (as amended, the Asset-Based Revolving Credit Facility);
borrowings of $2,950.0 million under our senior secured term loan facility (as amended, the Senior Secured Term Loan Facility and, together with the Asset-Based Revolving Credit Facility, the Senior Secured Credit Facilities);
issuance of $960.0 million aggregate principal amount of 8.00% senior cash pay notes due 2021 (the Cash Pay Notes);
issuance of $600.0 million aggregate principal amount of 8.75%/9.50% senior PIK toggle notes due 2021 (the PIK Toggle Notes); and

8


$1,583.3 million of equity investments from Parent funded by direct and indirect equity investments from the Sponsors, certain co-investors and management.
The Acquisition occurred simultaneously with:

the closing of the financing transactions and equity investments described previously;
the termination of our former $700.0 million senior secured asset-based revolving credit facility (the Former Asset-Based Revolving Credit Facility); and
the termination of our former $2,560.0 million senior secured term loan facility (the Former Senior Secured Term Loan Facility and, together with the Former Asset-Based Revolving Credit Facility, the Former Senior Secured Credit Facilities).
We have accounted for the Acquisition in accordance with the provisions of FASB Accounting Standards Codification Topic 805, Business Combinations, whereby the purchase price paid to effect the Acquisition was allocated to state the acquired assets and liabilities at fair value.  The Acquisition and the preliminary allocation of the purchase price were recorded for accounting purposes as of November 2, 2013, the end of our first quarter of fiscal year 2014.

In connection with the allocation of the purchase price, we made estimates of the fair values of our long-lived and intangible assets based upon assumptions related to the future cash flows, discount rates and asset lives utilizing currently available information, and in some cases, valuation results from independent valuation specialists.  As of November 2, 2013, we recorded preliminary purchase accounting adjustments to increase the carrying value of our property and equipment and inventory, to revalue intangible assets for our tradenames, customer lists and favorable lease commitments and to revalue our long-term benefit plan obligations, among other things. We revised these preliminary purchase accounting adjustments during the second, third and fourth quarters of fiscal year 2014 as additional information became available. The final purchase accounting adjustments, as reflected in our Consolidated Balance Sheet as of August 2, 2014, were as follows (in millions):
Consideration payable to former equity holders (including $26.8 million management rollover)
 

 
$
3,382.7

Capitalized transaction costs
 

 
32.7

Total consideration paid to effect the Acquisition
 

 
3,415.4

 
 
 
 
Net assets acquired at historical cost
 

 
821.9

 
 
 
 
Adjustments to state acquired assets at fair value:
 

 
 

(1) Increase carrying value of merchandise inventories
$
129.6

 
 

(2) Increase carrying value of property and equipment
457.7

 
 

(3) Revalue intangible assets:
 

 
 

Tradenames
739.3

 
 

Other definite-lived intangible assets, primarily customer lists
492.1

 
 

Favorable lease commitments
799.8

 
 

(4) Change in carrying values of other assets and liabilities
(67.0
)
 
 

(5) Write-off of historical deferred lease credits
102.3

 
 

(6) Write-off of historical debt issuance costs
(31.3
)
 
 

(7) Write-off of historical goodwill
(1,263.4
)
 
 

(8) Settlement of unvested Predecessor stock options (Note 10)
51.5

 
 

(9) Tax impact of valuation adjustments and other tax benefits
(965.7
)
 
 

Total adjustments to state acquired assets at fair value
 

 
444.9

Net assets acquired at fair value
 

 
1,266.8

 
 
 
 
Excess purchase price related to the Acquisition recorded as goodwill
 

 
$
2,148.6


The accompanying Condensed Consolidated Financial Statements as of May 3, 2014 and for the thirteen and twenty-six weeks then ended have been recast to reflect the final purchase accounting adjustments reflected in our Consolidated Balance Sheet as of August 2, 2014.


9


3.              MyTheresa Acquisition

In October 2014, we acquired MyTheresa, a luxury retailer headquartered in Munich, Germany. The operations of MyTheresa are primarily conducted through the MyTheresa.com global luxury website. As of the time of the acquisition, the annual revenues of MyTheresa were approximately $130 million. The purchase price paid to acquire MyTheresa, net of cash acquired, was $181.7 million, which was financed through a combination of cash and debt. In addition, the MyTheresa purchase agreement contains contingent earn-out payments of up to €27.5 million per year for operating performance for each of calendar years 2015 and 2016.
During the third quarter of fiscal year 2015, we finalized the allocation of the purchase price paid to the acquired assets and liabilities of MyTheresa. Acquired intangible assets and the contingent earn-out obligation at fair value are as follows:

(in millions)
 
Acquisition
Fair Value
 
 
 
Customer lists
 
$
18.8

Tradenames
 
74.8

Goodwill
 
140.0

Contingent earn-out obligation
 
50.0

 
MyTheresa results of operations are included in our condensed consolidated results of operations effective the second quarter of fiscal year 2015.


4.              Fair Value Measurements
 
Fair value is the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability.  Assets and liabilities are classified using a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value as follows:

Level 1 — Unadjusted quoted prices for identical instruments traded in active markets.
Level 2 — Observable market-based inputs or unobservable inputs corroborated by market data.
Level 3 — Unobservable inputs reflecting management’s estimates and assumptions.
The following table shows the Company’s financial assets that are required to be measured at fair value on a recurring basis in our Condensed Consolidated Balance Sheets:
 
 
Fair Value
Hierarchy
 
May 2,
2015
 
August 2,
2014
 
May 3,
2014
(in thousands)
 
 
 
(Successor)
 
(Successor)
 
(Successor)
Other long-term assets:
 
 
 
 

 
 

 
 

Interest rate caps
 
Level 2
 
$
106

 
$
1,132

 
$
2,000

 
 
 
 
 
 
 
 
 
Other long-term liabilities:
 
 
 
 
 
 
 
 
Contingent earn-out obligation
 
Level 3
 
$
45,661

 
$

 
$

 
The fair value of the interest rate caps are estimated using industry standard valuation models using market-based observable inputs, including interest rate curves.  In addition, the fair value of the interest rate caps includes consideration of the counterparty’s non-performance risk.

The fair value of the contingent earn-out obligation incurred in connection with the acquisition of MyTheresa was estimated as of the acquisition date using a valuation model that measured the present value of the probable cash payments to be made. The significant unobservable inputs used in the fair value measurement are the forecasted operating performance of MyTheresa and the discount rate that captures the risk associated with the obligation. We update our assumptions based on new developments and adjust the carrying value of the obligation to its estimated fair value at each reporting date.
 

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The carrying values of cash and cash equivalents, credit card receivables and accounts payable approximate fair value due to their short-term nature.  We determine the fair value of our long-term debt on a non-recurring basis, which results are summarized as follows:
 
 
 
 
May 2, 2015
(Successor)
 
August 2, 2014
(Successor)
 
May 3, 2014
(Successor)
(in thousands)
 
Fair Value
Hierarchy
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
Long-term debt:
 
 
 
 

 
 

 
 

 
 

 
 

 
 

Asset-Based Revolving Credit Facility
 
Level 2
 
$
150,000

 
$
150,000

 
$

 
$

 
$
45,000

 
$
45,000

Senior Secured Term Loan Facility
 
Level 2
 
2,905,842

 
2,920,371

 
2,927,912

 
2,907,797

 
2,935,268

 
2,935,268

Cash Pay Notes
 
Level 2
 
960,000

 
1,034,400

 
960,000

 
994,800

 
960,000

 
1,046,400

PIK Toggle Notes
 
Level 2
 
600,000

 
648,120

 
600,000

 
633,000

 
600,000

 
657,000

2028 Debentures
 
Level 2
 
122,196

 
125,320

 
122,035

 
127,500

 
121,982

 
125,156

 
We estimated the fair value of long-term debt using (i) prevailing market rates for debt of similar remaining maturities and credit risk for the Senior Secured Credit Facilities and (ii) quoted market prices of the same or similar issues for the Cash Pay Notes, the PIK Toggle Notes and the $125.0 million aggregate principal amount of 7.125% Debentures due 2028 (the 2028 Debentures and, together with the Cash Pay Notes and the PIK Toggle Notes, the Notes).
 
In connection with purchase accounting, we made estimates of the fair value of our long-lived and intangible assets based upon assumptions related to the future cash flows, discount rates and asset lives utilizing currently available information, and in some cases, valuation results from independent valuation specialists (Level 3 determination of fair value).  We also measure certain non-financial assets at fair value on a non-recurring basis, primarily long-lived assets, intangible assets and goodwill, in connection with our periodic evaluations of such assets for potential impairment.


5.     Intangible Assets, Net and Goodwill
 
 
 
May 2,
2015
 
August 2,
2014
 
May 3,
2014
(in thousands)
 
(Successor)
 
(Successor)
 
(Successor)
 
 
 
 
 
 
 
Favorable lease commitments, net
 
$
1,054,092

 
$
1,094,767

 
$
1,108,291

Other definite-lived intangible assets, net
 
536,960

 
587,519

 
623,537

Tradenames
 
2,034,398

 
1,970,698

 
1,970,698

Intangible assets, net
 
$
3,625,450

 
$
3,652,984

 
$
3,702,526

 
 
 
 
 
 
 
Goodwill
 
$
2,267,897

 
$
2,148,627

 
$
2,148,627


Intangible Assets Subject to Amortization. Our definite-lived intangible assets, which primarily consist of customer lists, are amortized using accelerated methods which reflect the pattern in which we receive the economic benefit of the asset, currently estimated at 6 to 16 years (weighted average life of 13 years from acquisition).  Favorable lease commitments are amortized straight-line over the remaining lives of the leases, ranging from two to 55 years (weighted average life of 30 years from acquisition).

Total amortization of all intangible assets recorded in connection with acquisitions for the current and next five fiscal years is currently estimated as follows (in thousands):
May 3, 2015 through August 1, 2015
$
28,815

2016
110,939

2017
105,031

2018
99,138

2019
96,014

2020
89,354


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At May 2, 2015, accumulated amortization was $174.6 million for other definite-lived intangible assets and $81.2 million for favorable lease commitments.

Indefinite-lived Intangible Assets and Goodwill.  Indefinite-lived intangible assets, such as our Neiman Marcus, Bergdorf Goodman and MyTheresa tradenames and goodwill, are not subject to amortization.  Rather, we assess the recoverability of indefinite-lived intangible assets and goodwill in the fourth quarter of each fiscal year and upon the occurrence of certain events.


6.              Long-term Debt
 
The significant components of our long-term debt are as follows:
 
 
Interest
Rate
 
May 2,
2015
 
August 2,
2014
 
May 3,
2014
(in thousands)
 
 
 
(Successor)
 
(Successor)
 
(Successor)
 
 
 
 
 
 
 
 
 
Asset-Based Revolving Credit Facility
 
variable
 
$
150,000

 
$

 
$
45,000

Senior Secured Term Loan Facility
 
variable
 
2,905,842

 
2,927,912

 
2,935,268

Cash Pay Notes
 
8.00%
 
960,000

 
960,000

 
960,000

PIK Toggle Notes
 
8.75%/9.50%
 
600,000

 
600,000

 
600,000

2028 Debentures
 
7.125%
 
122,196

 
122,035

 
121,982

Total debt
 
 
 
4,738,038

 
4,609,947

 
4,662,250

Less: current portion of Senior Secured Term Loan Facility
 
 
 
(29,426
)
 
(29,426
)
 
(29,426
)
Long-term debt
 
 
 
$
4,708,612

 
$
4,580,521

 
$
4,632,824

Asset-Based Revolving Credit Facility.  At May 2, 2015, we had a senior secured Asset-Based Revolving Credit Facility providing for a maximum committed borrowing capacity of $900.0 million. The Asset-Based Revolving Credit Facility matures on October 25, 2018.  On May 2, 2015, we had $150.0 million of borrowings outstanding under this facility, no outstanding letters of credit and $660.0 million of unused borrowing availability.
 
Availability under the Asset-Based Revolving Credit Facility is subject to a borrowing base.  The Asset-Based Revolving Credit Facility includes borrowing capacity available for letters of credit (up to $150.0 million, with any such issuance of letters of credit reducing the amount available under the Asset-Based Revolving Credit Facility on a dollar-for-dollar basis) and for borrowings on same-day notice.  The borrowing base is equal to at any time the sum of (a) 90% of the net orderly liquidation value of eligible inventory, net of certain reserves, plus (b) 90% of the amounts owed by credit card processors in respect of eligible credit card accounts constituting proceeds from the sale or disposition of inventory, less certain reserves, plus (c) 100% of segregated cash held in a restricted deposit account.  To the extent that excess availability is not equal to or greater than the greater of (a) 10% of the lesser of (1) the aggregate revolving commitments and (2) the borrowing base and (b) $50.0 million, we will be required to maintain a fixed charge coverage ratio.
 
The Asset-Based Revolving Credit Facility permits us to increase commitments under the Asset-Based Revolving Credit Facility or add one or more incremental term loans to the Asset-Based Revolving Credit Facility by an amount not to exceed $200.0 million. However, the lenders are under no obligation to provide any such additional commitments or loans, and any increase in commitments or incremental term loans will be subject to customary conditions precedent.  If we were to request any such additional commitments and the existing lenders or new lenders were to agree to provide such commitments, the size of the Asset-Based Revolving Credit Facility could be increased to up to $1,100.0 million, but our ability to borrow would still be limited by the amount of the borrowing base.  The cash proceeds of any incremental term loans may be used for working capital and general corporate purposes.

At May 2, 2015, borrowings under the Asset-Based Revolving Credit Facility bore interest at a rate per annum equal to, at our option, either (a) a base rate determined by reference to the highest of (1) the prime rate of Deutsche Bank AG New York Branch (the administrative agent), (2) the federal funds effective rate plus ½ of 1.00% and (3) the adjusted one-month LIBOR plus 1.00%, or (b) LIBOR, subject to certain adjustments, in each case plus an applicable margin (1.25% at May 2, 2015).  The applicable margin is up to 0.75% with respect to base rate borrowings and up to 1.75% with respect to LIBOR borrowings.  The applicable margin is subject to adjustment based on the average historical excess availability under the Asset-Based Revolving Credit Facility. The weighted average interest rate on the outstanding borrowings pursuant to the Asset-Based Revolving Credit Facility was 1.78% at May 2, 2015.  In addition, we are required to pay a commitment fee in respect of unused commitments at a rate of 0.25% per annum.  We must also pay customary letter of credit fees and agency fees.


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If at any time the aggregate amount of outstanding revolving loans, unreimbursed letter of credit drawings and undrawn letters of credit under the Asset-Based Revolving Credit Facility exceeds the lesser of (a) the aggregate revolving commitments and (b) the borrowing base, we will be required to repay outstanding loans or cash collateralize letters of credit in an aggregate amount equal to such excess, with no reduction of the commitment amount.  If the excess availability under the Asset-Based Revolving Credit Facility is less than the greater of (a) 10% of the lesser of (1) the aggregate revolving commitments and (2) the borrowing base and (b) $50.0 million for a period of five or more consecutive business days, funds held in a collection account maintained with the agent would be applied to repay the loans and other obligations and cash collateralize letters of credit.  We would then be required to make daily deposits in the collection account maintained with the agent under the Asset-Based Revolving Credit Facility.
 
We may voluntarily reduce the unutilized portion of the commitment amount and repay outstanding loans at any time without premium or penalty other than customary “breakage” costs with respect to LIBOR loans.  There is no scheduled amortization under the Asset-Based Revolving Credit Facility; the principal amount of the revolving loans outstanding thereunder will be due and payable in full on October 25, 2018, unless extended.
 
The Asset-Based Revolving Credit Facility is guaranteed by Holdings and each of our current and future direct and indirect wholly owned subsidiaries (subsidiary guarantors) other than (a) unrestricted subsidiaries, (b) certain immaterial subsidiaries, (c) foreign subsidiaries and any domestic subsidiary of a foreign subsidiary, (d) certain holding companies of foreign subsidiaries, (e) captive insurance subsidiaries, not for profit subsidiaries, or a subsidiary which is a special purpose entity for securitization transactions or like special purposes and (f) any subsidiary that is prohibited by applicable law or contractual obligation from acting as a guarantor or which would require governmental approval to provide a guarantee. At May 2, 2015, the assets of non-guarantor subsidiaries, primarily NMG Germany GmbH (through which we conduct the operations of MyTheresa), aggregated $249.9 million, or 2.8% of consolidated total assets. All obligations under the Asset-Based Revolving Credit Facility, and the guarantees of those obligations, are secured, subject to certain significant exceptions, by substantially all of the assets of Holdings, the Company and the subsidiary guarantors.
The Asset-Based Revolving Credit Facility contains covenants limiting, among other things, dividends and other restricted payments, investments, loans, advances and acquisitions, and prepayments or redemptions of other indebtedness.  These covenants permit such restricted actions in an unlimited amount, subject to the satisfaction of certain payment conditions, principally that we must have (x) pro forma excess availability under the Asset-Based Revolving Credit Facility for each day of the 30-day period prior to such actions, which exceeds the greater of $90.0 million or 15% of the lesser of (a) the revolving commitments under the Asset-Based Revolving Credit Facility and (b) the borrowing base and (y) a pro forma fixed charge coverage ratio of at least 1.0 to 1.0, unless pro forma excess availability for each day of the 30-day period prior to such actions under the Asset-Based Revolving Credit Facility would exceed the greater of (1) $200.0 million and (2) 25% of the lesser of (i) the aggregate revolving commitments under the Asset-Based Revolving Credit Facility and (ii) the borrowing base.  The Asset-Based Revolving Credit Facility also contains customary affirmative covenants and events of default, including a cross-default provision in respect of any other indebtedness that has an aggregate principal amount exceeding $50.0 million.
For a more detailed description of the Asset-Based Revolving Credit Facility, refer to Note 7 of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended August 2, 2014.
 
Senior Secured Term Loan Facility.  On October 25, 2013, we entered into a credit agreement and related security and other agreements for the $2,950.0 million Senior Secured Term Loan Facility. At May 2, 2015 (after giving effect to the Refinancing Amendment described below), the outstanding balance under the Senior Secured Term Loan Facility was $2,905.8 million. The principal amount of the loans outstanding is due and payable in full on October 25, 2020.
 
The Senior Secured Term Loan Facility permits us to increase the term loans or add a separate tranche of term loans by an amount not to exceed $650.0 million plus an unlimited amount that would result (a) in the case of any incremental term loan facility to be secured equally and ratably with the term loans, a senior secured first lien net leverage ratio equal to or less than 4.25 to 1.00, and (b) in the case of any incremental term loan facility to be secured on a junior basis to the term loans, to be subordinated in right of payment to the term loans or unsecured and pari passu in right of payment with the term loans, a total net leverage ratio equal to or less than the total net leverage ratio as of October 25, 2013.

On March 13, 2014, we entered into a refinancing amendment with respect to the Senior Secured Term Loan Facility (the Refinancing Amendment). The Refinancing Amendment provided for an immediate reduction in the interest rate margin applicable to the loans outstanding under the Senior Secured Term Loan Facility from (a) 4.00% to 3.25% for LIBOR borrowings and (b) 3.00% to 2.25% for base rate borrowings. In addition, the interest rate margin in the event of a step down based on our senior secured first lien net leverage, as defined in the credit agreement governing the Senior Secured Term Loan Facility, was reduced from (1) 3.75% to 3.00% for LIBOR borrowings and (2) 2.75% to 2.00% for base rate borrowings. Substantially all other terms are

13


consistent with the credit agreement governing the Senior Secured Term Loan Facility as of October 25, 2013, including the amortization schedule and maturity dates. In connection with the Refinancing Amendment, we incurred costs of $29.5 million, which were capitalized as debt issuance costs (included in other assets). In addition, we incurred a loss on debt extinguishment of $7.9 million, which primarily consisted of the write-off of debt issuance costs, previously incurred in connection with the initial issuance of the Senior Secured Term Loan Facility, allocable to lenders that no longer participate in the Senior Secured Term Loan Facility subsequent to the refinancing. The loss on debt extinguishment was recorded in the third quarter of fiscal year 2014 as a component of interest expense.
 
At May 2, 2015, borrowings under the Senior Secured Term Loan Facility bore interest at a rate per annum equal to, at our option, either (a) a base rate determined by reference to the highest of (1) the prime rate of Credit Suisse AG (the administrative agent), (2) the federal funds effective rate plus ½ of 1.00% and (3) the adjusted one-month LIBOR plus 1.00%, or (b) an adjusted LIBOR (for a period equal to the relevant interest period, and in any event, never less than 1.00%), subject to certain adjustments, in each case plus an applicable margin.  The applicable margin is up to 2.25% with respect to base rate borrowings and up to 3.25% with respect to LIBOR borrowings.  The applicable margin is subject to adjustment based on our senior secured first lien net leverage ratio.  The applicable margin with respect to outstanding LIBOR borrowings was 3.25% at May 2, 2015.  The interest rate on the outstanding borrowings pursuant to the Senior Secured Term Loan Facility was 4.25% at May 2, 2015.
 
Subject to certain exceptions and reinvestment rights, the Senior Secured Term Loan Facility requires that 100% of the net cash proceeds from certain asset sales and debt issuances and 50% (which percentage will be reduced to 25% if our senior secured first lien net leverage ratio, as defined in the credit agreement governing the Senior Secured Term Loan Facility, is equal to or less than 4.0 to 1.0 but greater than 3.5 to 1.0 and will be reduced to 0% if our senior secured first lien net leverage ratio is equal to or less than 3.5 to 1.0) from excess cash flow, as defined in the credit agreement governing the Senior Secured Term Loan Facility, for each of our fiscal years (commencing with the period ending July 26, 2015) must be used to prepay outstanding term loans under our Senior Secured Term Loan Facility at 100% of the principal amount to be prepaid, plus accrued and unpaid interest. We were not required to prepay any outstanding term loans pursuant to the annual excess cash flow requirements for fiscal year 2014.
 
We may repay all or any portion of the Senior Secured Term Loan Facility at any time, subject to redeployment costs in the case of prepayment of LIBOR borrowings other than the last day of the relevant interest period. The Senior Secured Term Loan Facility amortizes in equal quarterly installments in an amount equal to 1.00% per annum of the principal amount outstanding as of the Refinancing Amendment, less certain voluntary or mandatory prepayments, with the remaining balance due at final maturity.
 
Our Senior Secured Term Loan Facility is guaranteed by Holdings and each of our current and future subsidiary guarantors other than (a) unrestricted subsidiaries, (b) certain immaterial subsidiaries, (c) foreign subsidiaries and any domestic subsidiary of a foreign subsidiary, (d) certain holding companies of foreign subsidiaries, (e) captive insurance subsidiaries, not for profit subsidiaries, or a subsidiary which is a special purpose entity for securitization transactions or like special purposes and (f) any subsidiary that is prohibited by applicable law or contractual obligation from acting as a guarantor or which would require governmental approval to provide a guarantee. As of May 2, 2015, the assets of non-guarantor subsidiaries, primarily NMG Germany GmbH (through which we conduct the operations of MyTheresa), aggregated $249.9 million, or 2.8% of consolidated total assets. All obligations under the Senior Secured Term Loan Facility, and the guarantees of those obligations, are secured, subject to certain exceptions, by substantially all of the assets of Holdings, the Company and the subsidiary guarantors.
The credit agreement governing the Senior Secured Term Loan Facility contains a number of negative covenants and covenants related to the security arrangements for the Senior Secured Term Loan Facility.  The credit agreement also contains customary affirmative covenants and events of default, including a cross-default provision in respect of any other indebtedness that has an aggregate principal amount exceeding $50.0 million.
For a more detailed description of the Senior Secured Term Loan Facility, refer to Note 7 of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended August 2, 2014.
 
Cash Pay Notes.  In connection with the Acquisition, we incurred indebtedness in the form of $960.0 million aggregate principal amount of 8.00% Senior Cash Pay Notes due 2021.  Interest on the Cash Pay Notes is payable semi-annually in arrears on each April 15 and October 15.  The Cash Pay Notes are guaranteed by the same entities that guarantee the Senior Secured Term Loan Facility, other than Holdings.  The Cash Pay Notes are unsecured and the guarantees are full and unconditional.  The Cash Pay Notes mature on October 15, 2021.

We may redeem the Cash Pay Notes, in whole or in part, at any time or from time to time prior to October 15, 2016, at a price equal to 100% of the principal amount of the Cash Pay Notes redeemed plus accrued and unpaid interest up to the redemption date plus the applicable premium. In addition, we may redeem up to 40% in the aggregate principal amount of the Cash Pay Notes with the

14


net proceeds of certain equity offerings at any time and from time to time before October 15, 2016 at a redemption price equal to 108.00% of the face amount thereof, plus accrued and unpaid interest up to the date of redemption, so long as at least 50% of the original aggregate principal amount of the Cash Pay Notes remain outstanding after such redemption and such redemption occurs within 120 days of the equity offering. On and after October 15, 2016, we may redeem the Cash Pay Notes, in whole or in part, at the redemption prices set forth in the indenture governing the Cash Pay Notes.

For a more detailed description of the Cash Pay Notes, refer to Note 7 of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended August 2, 2014.

PIK Toggle Notes.  In connection with the Acquisition, we incurred indebtedness in the form of $600.0 million aggregate principal amount of our 8.75%/9.50% Senior PIK Toggle Notes due 2021. The PIK Toggle Notes are guaranteed by the same entities that guarantee the Senior Secured Term Loan Facility, other than Holdings. The PIK Toggle Notes are unsecured and the guarantees are full and unconditional. The PIK Toggle Notes mature on October 15, 2021. Interest on the PIK Toggle Notes is payable semi-annually in arrears on each April 15 and October 15.  Interest on the PIK Toggle Notes was paid entirely in cash for the first two interest payments and now may be paid (i) entirely in cash (Cash Interest), (ii) entirely by increasing the principal amount of the PIK Toggle Notes by the relevant interest (PIK Interest), or (iii) 50% in Cash Interest and 50% in PIK Interest, subject to certain restrictions on the timing and number of elections of PIK Interest or partial PIK Interest payments.  Cash Interest on the PIK Toggle Notes accrues at a rate of 8.75% per annum.  PIK Interest on the PIK Toggle Notes accrues at a rate of 9.50% per annum.

We may redeem the PIK Toggle Notes, in whole or in part, at any time and from time to time prior to October 15, 2016, at a price equal to 100% of the principal amount of the PIK Toggle Notes redeemed plus accrued and unpaid interest up to the redemption date plus the applicable premium. In addition, we may redeem up to 40% in the aggregate principal amount of the PIK Toggle Notes with the net proceeds of certain equity offerings at any time and from time to time before October 15, 2016 at a redemption price equal to 108.75% of the face amount thereof, plus accrued and unpaid interest up to the date of redemption, so long as at least 50% of the original aggregate principal amount of the PIK Toggle Notes remain outstanding after such redemption and such redemption occurs within 120 days of the equity offering. On and after October 15, 2016, we may redeem the PIK Toggle Notes, in whole or in part, at the redemption prices set forth in the indenture governing the PIK Toggle Notes.

For a more detailed description of the PIK Toggle Notes, refer to Note 7 of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended August 2, 2014.

2028 Debentures.  We have outstanding $125.0 million aggregate principal amount of our 7.125% Senior Debentures due 2028.  The 2028 Debentures are secured by a first lien security interest on certain collateral subject to liens granted under the Senior Secured Credit Facilities.  The 2028 Debentures are guaranteed on an unsecured, senior basis by the Company.  The guarantee is full and unconditional.  At May 2, 2015, our non-guarantor subsidiaries consisted principally of Bergdorf Goodman, Inc., through which we conduct the operations of our Bergdorf Goodman stores, NM Nevada Trust, which holds legal title to certain real property and intangible assets used by us in conducting our operations, and NMG Germany GmbH, through which we conduct the operations of MyTheresa.  The 2028 Debentures include certain restrictive covenants and a cross-acceleration provision in respect of any other indebtedness that has an aggregate principal amount exceeding $15.0 million.  The 2028 Debentures mature on June 1, 2028.
 
For a more detailed description of the 2028 Debentures, refer to Note 7 of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended August 2, 2014.
 
Former Asset-Based Revolving Credit Facility.  In connection with the Acquisition, we repaid all outstanding obligations of $145.0 million under the Former Asset-Based Revolving Credit Facility and terminated the facility on October 25, 2013.  This facility was replaced by the Asset-Based Revolving Credit Facility.
 
Former Senior Secured Term Loan Facility.  In connection with the Acquisition, we repaid the outstanding balance of $2,433.1 million under our Former Senior Secured Term Loan Facility on October 25, 2013.  This facility was replaced by the Senior Secured Term Loan Facility.

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Maturities of Long-term Debt.  Annual maturities of long-term debt outstanding at May 2, 2015 during the current and next five fiscal years and thereafter are as follows (in millions):
May 3, 2015 through August 1, 2015
$
7.4

2016
29.4

2017
29.4

2018
29.4

2019
179.4

2020
29.4

Thereafter
4,433.6

 
The previous table does not reflect future excess cash flow prepayments, if any, that may be required under the Senior Secured Term Loan Facility.
 
Interest Expense.  The significant components of interest expense are as follows:
 
 
Quarter-to-date
 
Year-to-date
 
 
Thirteen
weeks ended
 
Thirteen
weeks ended
 
Thirty-nine
weeks ended
 
Twenty-six
weeks ended
 
 
Thirteen
weeks ended
 
 
May 2,
2015
 
May 3,
2014
 
May 2,
2015
 
May 3,
2014
 
 
November 2,
2013
(in thousands)
 
(Successor)
 
(Successor)
 
(Successor)
 
(Successor)
 
 
(Predecessor)
 
 
 
 
 
 
 
 
 
 
 
 
Asset-Based Revolving Credit Facility
 
$
402

 
$
33

 
$
1,117

 
$
291

 
 
$
75

Senior Secured Term Loan Facility
 
31,326

 
34,003

 
94,310

 
71,286

 
 
3,687

Cash Pay Notes
 
19,200

 
18,986

 
57,600

 
38,400

 
 
2,773

PIK Toggle Notes
 
13,125

 
12,979

 
39,375

 
26,250

 
 
1,896

2028 Debentures
 
2,227

 
2,227

 
6,680

 
4,454

 
 
2,226

Former Asset-Based Revolving Credit Facility
 

 

 

 

 
 
477

Former Senior Secured Term Loan Facility
 

 

 

 

 
 
22,521

Amortization of debt issue costs
 
6,143

 
5,845

 
18,417

 
10,990

 
 
2,466

Other, net
 
923

 
570

 
2,100

 
1,094

 
 
1,334

Capitalized interest
 
(502
)
 
(303
)
 
(1,680
)
 
(566
)
 
 
(140
)
 
 
$
72,844

 
$
74,340

 
$
217,919

 
$
152,199

 
 
$
37,315

Loss on debt extinguishment
 

 
7,882

 

 
7,882

 
 

Interest expense, net
 
$
72,844

 
$
82,222

 
$
217,919

 
$
160,081

 
 
$
37,315

 
We recorded interest expense of $8.4 million during the first quarter of fiscal year 2014 related to debt incurred as a result of the Acquisition.


7.              Derivative Financial Instruments
 
At May 2, 2015, we had outstanding floating rate debt obligations of $3,055.8 million. In April 2014, we entered into interest rate cap agreements (at a cost of $2.0 million) for an aggregate notional amount of $1,400.0 million to hedge the variability of our cash flows related to a portion of our floating rate indebtedness. The interest rate cap agreements cap LIBOR at 3.00% from December 2014 through December 2016 with respect to the $1,400.0 million notional amount of such agreements. In the event LIBOR is less than 3.00%, we will pay interest at the lower LIBOR rate. In the event LIBOR is higher than 3.00%, we will pay interest at the capped rate of 3.00%. On May 2, 2015, the fair value of our interest rate caps was $0.1 million.
Gains and losses realized due to the expiration of applicable portions of the interest rate caps are reclassified to interest expense at the time our quarterly interest payments are made.  Losses of $0.4 million were realized in the first quarter of fiscal year 2014. No gains or losses were realized in the third quarter of fiscal years 2015 and 2014, year-to-date fiscal 2015 or the twenty-six weeks ended May 3, 2014.


16


8.              Income Taxes
 
Our effective income tax rates are as follows:
 
 
Quarter-to-date
 
Year-to-date
 
 
Thirteen
weeks ended
 
Thirteen
weeks ended
 
Thirty-nine
weeks ended
 
Twenty-six
weeks ended
 
 
Thirteen
weeks ended
 
 
May 2,
2015
 
May 3,
2014
 
May 2,
2015
 
May 3,
2014
 
 
November 2,
2013
 
 
(Successor)
 
(Successor)
 
(Successor)
 
(Successor)
 
 
(Predecessor)
 
 
 
 
 
 
 
 
 
 
 
 
Effective income tax rate
 
43.6
%
 
58.5
%
 
41.6
%
 
41.9
%
 
 
152.9
%

Our effective income tax rates for the third quarter of fiscal year 2015 and year-to-date fiscal 2015 exceeded the federal statutory tax rate due to the non-deductible portion of transaction and other costs incurred in connection with our acquisition of MyTheresa and state income taxes. Our effective income tax rates for the third quarter of fiscal year 2014, the twenty-six weeks ended May 3, 2014 and the first quarter of fiscal year 2014 exceeded the federal statutory tax rates due to the non-deductible portion of transaction costs incurred in connection with the Acquisition, state income taxes and the lack of a U.S. tax benefit related to the losses from our prior investment in a foreign e-commerce retailer.
 
At May 2, 2015, the gross amount of unrecognized tax benefits was $2.0 million ($1.3 million of which would impact our effective tax rate, if recognized).  We classify interest and penalties as a component of income tax expense and our liability for accrued interest and penalties was $4.6 million at May 2, 2015, $5.1 million at August 2, 2014 and $5.0 million at May 3, 2014.
 
We file income tax returns in the U.S. federal jurisdiction and various state, local and foreign jurisdictions.  The Internal Revenue Service (IRS) is currently auditing our fiscal year 2012 and short-year 2013 federal income tax returns. With respect to state, local and foreign jurisdictions, with limited exceptions, we are no longer subject to income tax audits for fiscal years before 2011.  We believe our recorded tax liabilities as of May 2, 2015 are sufficient to cover any potential assessments to be made by the IRS or other taxing authorities upon the completion of their examinations and we will continue to review our recorded tax liabilities for potential audit assessments based upon subsequent events, new information and future circumstances.  We believe it is reasonably possible that additional adjustments in the amounts of our unrecognized tax benefits could occur within the next twelve months as a result of settlements with tax authorities or expiration of statutes of limitation.  At this time, we do not believe such adjustments will have a material impact on our Condensed Consolidated Financial Statements.
 
Subsequent to the Acquisition, Parent and its subsidiaries, including the Company, file U.S. federal income taxes as a consolidated group.  The Company has elected to be treated as a corporation for U.S. federal income tax purposes and all operations of Parent are conducted through Holdings and its subsidiaries, including the Company. Income taxes are presented as if the Company and its subsidiaries are separate taxpayers from Parent. There are no differences between the Company's and Parent's current and deferred income taxes.


9.              Employee Benefit Plans
 
Description of Benefit Plans.  We currently maintain defined contribution plans consisting of a retirement savings plan (RSP) and a defined contribution supplemental executive retirement plan (Defined Contribution SERP Plan).  In addition, we sponsor a defined benefit pension plan (Pension Plan) and an unfunded supplemental executive retirement plan (SERP Plan), which provides certain employees additional pension benefits.  As of the third quarter of fiscal year 2010, benefits offered to all participants in our Pension Plan and SERP Plan were frozen.  Retirees and active employees hired prior to March 1, 1989 are eligible for certain limited postretirement health care benefits (Postretirement Plan) if they meet certain service and minimum age requirements.  We also sponsor an unfunded key employee deferred compensation plan, which provides certain employees with additional benefits.

17


Obligations for our employee benefit plans, included in other long-term liabilities, are as follows:
 
 
May 2,
2015
 
August 2,
2014
 
May 3,
2014
(in thousands)
 
(Successor)
 
(Successor)
 
(Successor)
 
 
 
 
 
 
 
Pension Plan
 
$
197,358

 
$
189,890

 
$
162,958

SERP Plan
 
109,515

 
113,787

 
108,481

Postretirement Plan
 
10,777

 
10,945

 
14,643

 
 
317,650

 
314,622

 
286,082

Less: current portion
 
(5,814
)
 
(6,602
)
 
(5,754
)
Long-term portion of benefit obligations
 
$
311,836

 
$
308,020

 
$
280,328

 
Funding Policy and Plan Status.  Our policy is to fund the Pension Plan at or above the minimum level required by law.  In fiscal year 2014, we were not required to make contributions to the Pension Plan. As of May 2, 2015, we do not believe we will be required to make contributions to the Pension Plan for fiscal year 2015.  We will continue to evaluate voluntary contributions to our Pension Plan based upon the unfunded position of the Pension Plan, our available liquidity and other factors.

Cost of Benefits. The components of the expenses we incurred under our Pension Plan, SERP Plan and Postretirement Plan are as follows:
 
 
Quarter-to-date
 
Year-to-date
 
 
Thirteen
weeks ended
 
Thirteen
weeks ended
 
Thirty-nine
weeks ended
 
Twenty-six
weeks ended
 
 
Thirteen
weeks ended
 
 
May 2,
2015
 
May 3,
2014
 
May 2,
2015
 
May 3,
2014
 
 
November 2,
2013
(in thousands)
 
(Successor)
 
(Successor)
 
(Successor)
 
(Successor)
 
 
(Predecessor)
 
 
 
 
 
 
 
 
 
 
 
 
Pension Plan:
 
 

 
 

 
 
 
 
 
 
 
Interest cost
 
$
6,382

 
$
6,420

 
$
19,146

 
$
12,201

 
 
$
5,781

Expected return on plan assets
 
(6,234
)
 
(6,167
)
 
(18,702
)
 
(12,333
)
 
 
(6,401
)
Net amortization of losses
 

 

 

 

 
 
1,095

Pension Plan expense (income)
 
$
148

 
$
253

 
$
444

 
$
(132
)
 
 
$
475

 
 
 
 
 
 
 
 
 
 
 
 
SERP Plan:
 
 

 
 

 
 
 
 
 
 
 
Interest cost
 
$
1,126

 
$
1,200

 
$
3,378

 
$
2,304

 
 
$
1,104

SERP Plan expense
 
$
1,126

 
$
1,200

 
$
3,378

 
$
2,304

 
 
$
1,104

 
 
 
 
 
 
 
 
 
 
 
 
Postretirement Plan:
 
 

 
 

 
 
 
 
 
 
 
Service cost
 
$
3

 
$
7

 
$
9

 
$
12

 
 
$
5

Interest cost
 
113

 
173

 
339

 
315

 
 
142

Net amortization of prior service cost
 

 

 

 

 
 
(321
)
Net amortization of (gains) losses
 
(93
)
 

 
(279
)
 

 
 
35

Postretirement Plan expense (income)
 
$
23

 
$
180

 
$
69

 
$
327

 
 
$
(139
)


10.       Stock-Based Compensation
 
Predecessor

Stock Options.  Predecessor had equity-based management arrangements, which authorized equity awards to be granted to certain management employees. At the time of the Acquisition, Predecessor stock options for 101,730 shares were outstanding, consisting of vested options for 67,899 shares and unvested options for 33,831 shares.  In connection with the Acquisition, previously unvested options became fully vested on October 25, 2013.
 
All Predecessor stock options were subject to settlement in connection with the Acquisition in amounts equal to the excess of the per share merger consideration over the exercise prices of such options.  The fair value of the consideration payable to holders of Predecessor stock options aggregated $187.4 million. Of such amount, $135.9 million represented the fair value of previously vested options, which was included in the consideration paid by the Sponsors to acquire the Company.  The remaining $51.5 million

18


represented the fair value of previously unvested options. Such amount was expensed in the results of operations of the Successor for the second quarter of fiscal year 2014.
 
Successor

Stock Options.  Subsequent to the Acquisition, Parent established various incentive plans pursuant to which eligible employees, consultants and non-employee directors are eligible to receive stock-based awards.  Under the incentive plans, Parent is authorized to grant stock options, restricted stock and other types of awards that are valued in whole or in part by reference to, or are payable or otherwise based on, the shares of common stock of Parent. Charges with respect to options issued by Parent pursuant to the incentive plans are reflected by the Company in the preparation of our Condensed Consolidated Financial Statements.

Co-Invest Options.  In connection with the Acquisition, certain executive officers of the Company rolled over a portion of the amounts otherwise payable in settlement of their Predecessor stock options into stock options of Parent representing a total of 56,979 shares of common stock of Parent (the Co-Invest Options).
 
The number of Co-Invest Options issued upon conversion of Predecessor stock options was equal to the product of (a) the number of shares subject to the applicable Predecessor stock options multiplied by (b) the ratio of the per share merger consideration over the fair market value of a share of Parent, which was approximately 3.1x (the Exchange Ratio).  The exercise price of each Predecessor stock option was adjusted by dividing the original exercise price of the Predecessor stock option by the Exchange Ratio.  Following the conversion, the exercise prices of the Co-Invest Options range from $180 to $644 per share.  As of the date of the Acquisition, the aggregate intrinsic value of the Co-Invest Options equaled the intrinsic value of the rolled over Predecessor stock options. The Co-Invest Options are fully vested and are exercisable at any time prior to the applicable expiration dates related to the original grant of the Predecessor options.  The Co-Invest Options contain sale and repurchase provisions.

Non-Qualified Stock Options.  Pursuant to the terms of the incentive plans, Parent granted time-vested and performance-vested non-qualified stock options to certain executive officers, non-executive officers and non-employee directors of the Company. These non-qualified stock options will expire no later than the tenth anniversary of the grant date and each grant consists of options to purchase an equal number of shares of Parent’s Class A common stock and Class B common stock.

Accounting for Successor Stock Options. Prior to an initial public offering (IPO), Parent generally has the right to repurchase shares issued upon exercise of vested stock options at the fair market value and shares underlying vested unexercised stock options for the difference between the fair market value of the underlying share and the exercise price in the event the optionee ceases to be an employee of the Company. However, if the optionee voluntarily leaves the Company without good reason or is terminated for cause, the repurchase price is the lesser of the exercise price of such options or the fair value of such awards at the employee termination date. In the event of the retirement of the optionee, the repurchase price is the fair value at the retirement date. Parent's repurchase rights expire upon completion of an IPO.

With respect to the Co-Invest Options, the fair value of such options at the Acquisition date was $36.3 million. Of such amount, $9.5 million represented the fair value of options held by Retirement Eligible Optionees for which a liability was established at the Acquisition date. The remaining value of $26.8 million represented the fair value of options held by non-retirement eligible optionees and such amount was credited to Successor equity.

At May 2, 2015, the aggregate number of co-invest, time-vested and performance-vested options held by Retirement Eligible Optionees aggregated 99,910 options. The recorded liability with respect to such options was $22.2 million at May 2, 2015, $15.8 million at August 2, 2014 and $14.3 million at May 3, 2014. We recognize compensation expense, which is included in selling, general and administrative expenses, for stock options on a straight-line basis over the vesting/performance periods.


19


The following table sets forth certain summary information with respect to our stock options for the periods indicated.
 
 
Quarter-to-date
 
Year-to-date
 
 
Thirteen
weeks ended
 
Thirteen
weeks ended
 
Thirty-nine
weeks ended
 
Twenty-six
weeks ended
 
 
Thirteen
weeks ended
 
 
May 2,
2015
 
May 3,
2014
 
May 2,
2015
 
May 3,
2014
 
 
November 2,
2013
(in thousands, except number of options and per option price)
 
(Successor)
 
(Successor)
 
(Successor)
 
(Successor)
 
 
(Predecessor)
 
 
 
 
 
 
 
 
 
 
 
 
Stock compensation expense
 
$
2,135

 
$
2,376

 
$
6,405

 
$
4,752

 
 
$
2,548

 
 
 
 
 
 
 
 
 
 
 
 
Stock option grants:
 
 

 
 

 
 

 
 
 
 
 
Number of options granted
 
2,240

 
12,008

 
8,243

 
157,992

 
 

Weighted average grant date fair value
 
$
363

 
$
407

 
$
335

 
$
407

 
 
$

 
 
 
 
 
 
 
 
 
 
 
 
Stock option exercises:
 
 

 
 

 
 

 
 
 
 
 
Number of options exercised
 

 

 
118

 

 
 
65

Weighted average exercise price
 
$

 
$

 
$
577

 
$

 
 
$
1,557



11.  Accumulated Other Comprehensive Loss
 
The following table summarizes the changes in accumulated other comprehensive loss by component (amounts are recorded net of related income taxes):
(in thousands)
 
Foreign
Currency
Translation
Adjustments
 
Unrealized
Losses on
Financial
Instruments
 
Unfunded
Benefit
Obligations
 
Total
Successor:
 
 
 
 

 
 

 
 

Balance, August 2, 2014
 
$

 
$
(954
)
 
$
(16,475
)
 
$
(17,429
)
Other comprehensive loss
 

 
(1,191
)
 
(1,910
)
 
(3,101
)
Balance, November 1, 2014
 
$

 
$
(2,145
)
 
$
(18,385
)
 
$
(20,530
)
Other comprehensive loss
 
(5,977
)
 
(1,741
)
 
(57
)
 
(7,775
)
Balance, January 31, 2015
 
$
(5,977
)
 
$
(3,886
)
 
$
(18,442
)
 
$
(28,305
)
Other comprehensive (loss) earnings
 
(15,707
)
 
925

 
(57
)
 
(14,839
)
Balance, May 2, 2015
 
$
(21,684
)
 
$
(2,961
)
 
$
(18,499
)
 
$
(43,144
)
 

12.       Income from Credit Card Program
 
We maintain a proprietary credit card program through which credit is extended to customers and have a related marketing and servicing alliance with affiliates of Capital One Financial Corporation (Capital One).  Pursuant to our agreement with Capital One (the Program Agreement), Capital One currently offers credit cards and non-card payment plans under both the “Neiman Marcus” and “Bergdorf Goodman” brand names.  Effective July 1, 2013, we amended and extended the Program Agreement to July 2020 (renewable thereafter for three-year terms), subject to early termination provisions.
 
We receive payments from Capital One based on sales transacted on our proprietary credit cards.  We may receive additional payments based on the profitability of the portfolio as determined under the Program Agreement depending on a number of factors, including credit losses.  In addition, we receive payments from Capital One for marketing and servicing activities we provide to Capital One.


20


13.       Other Expenses
 
Other expenses consists of the following components:
 
 
Quarter-to-date
 
Year-to-date
 
 
Thirteen
weeks ended
 
Thirteen
weeks ended
 
Thirty-nine
weeks ended
 
Twenty-six
weeks ended
 
 
Thirteen
weeks ended
 
 
May 2,
2015
 
May 3,
2014
 
May 2,
2015
 
May 3,
2014
 
 
November 2,
2013
(in thousands)
 
(Successor)
 
(Successor)
 
(Successor)
 
(Successor)
 
 
(Predecessor)
 
 
 
 
 
 
 
 
 
 
 
 
Costs incurred in connection with the Acquisition:
 
 

 
 

 
 
 
 
 
 
 
Change-in-control cash payments due to Former Sponsors and management
 
$

 
$

 
$

 
$

 
 
$
80,457

Stock-based compensation for accelerated vesting of Predecessor stock options (including non-cash charges of $15.4 million)
 

 

 

 
51,510

 
 

Other, primarily professional fees
 

 

 

 
1,732

 
 
28,942

Total transaction costs
 

 

 

 
53,242

 
 
109,399

MyTheresa acquisition costs
 
376

 

 
11,814

 

 
 

Expenses related to cyber-attack, net of insurance recovery
 
1,321

 
4,477

 
4,121

 
8,565