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EX-32.1 - EXHIBIT 32.1 - Neiman Marcus Group LTD LLCexhibit321-q1fy18.htm
EX-31.2 - EXHIBIT 31.2 - Neiman Marcus Group LTD LLCexhibit312-q1fy18.htm
EX-31.1 - EXHIBIT 31.1 - Neiman Marcus Group LTD LLCexhibit311-q1fy18.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 October 28, 2017
 
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, a smaller reporting company or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth 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)
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.     o
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)
 
(in thousands, except units)
 
October 28,
2017
 
July 29,
2017
 
October 29,
2016
 
 
 
 
 
 
 
ASSETS
 
 

 
 

 
 

Current assets:
 
 

 
 

 
 

Cash and cash equivalents
 
$
41,464

 
$
49,239

 
$
42,077

Credit card receivables
 
44,345

 
38,836

 
42,699

Merchandise inventories
 
1,342,296

 
1,153,657

 
1,325,060

Other current assets
 
134,341

 
146,439

 
141,622

Total current assets
 
1,562,446

 
1,388,171

 
1,551,458

 
 
 
 
 
 
 
Property and equipment, net
 
1,559,566

 
1,586,961

 
1,607,499

Intangible assets, net
 
2,809,015

 
2,831,416

 
3,218,582

Goodwill
 
1,885,391

 
1,880,894

 
2,075,122

Other long-term assets
 
23,306

 
16,074

 
13,715

Total assets
 
$
7,839,724

 
$
7,703,516

 
$
8,466,376

 
 
 
 
 
 
 
LIABILITIES AND MEMBER EQUITY
 
 

 
 

 
 

Current liabilities:
 
 

 
 

 
 

Accounts payable
 
$
327,930

 
$
316,830

 
$
347,287

Accrued liabilities
 
514,317

 
456,937

 
485,450

Current portion of long-term debt
 
29,426

 
29,426

 
29,426

Total current liabilities
 
871,673

 
803,193

 
862,163

 
 
 
 
 
 
 
Long-term liabilities:
 
 

 
 

 
 

Long-term debt, net of debt issuance costs
 
4,783,224

 
4,675,540

 
4,772,596

Deferred income taxes
 
1,147,182

 
1,156,833

 
1,281,296

Other long-term liabilities
 
586,086

 
601,298

 
627,343

Total long-term liabilities
 
6,516,492

 
6,433,671

 
6,681,235

 
 
 
 
 
 
 
Membership unit (1 unit issued and outstanding at October 28, 2017, July 29, 2017 and October 29, 2016)
 

 

 

Member capital
 
1,587,813

 
1,587,086

 
1,586,606

Accumulated other comprehensive loss
 
(53,034
)
 
(63,431
)
 
(114,871
)
Accumulated deficit
 
(1,083,220
)
 
(1,057,003
)
 
(548,757
)
Total member equity
 
451,559

 
466,652

 
922,978

Total liabilities and member equity
 
$
7,839,724

 
$
7,703,516

 
$
8,466,376

 
See Notes to Condensed Consolidated Financial Statements.


1


NEIMAN MARCUS GROUP LTD LLC
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
 
 
 
Thirteen weeks ended
(in thousands)
 
October 28,
2017
 
October 29,
2016
 
 
 
 
 
Revenues
 
$
1,120,299

 
$
1,079,107

Cost of goods sold including buying and occupancy costs (excluding depreciation)
 
722,887

 
699,895

Selling, general and administrative expenses (excluding depreciation)
 
295,280

 
276,596

Income from credit card program
 
(11,864
)
 
(13,668
)
Depreciation expense
 
55,228

 
56,884

Amortization of intangible assets
 
12,164

 
13,623

Amortization of favorable lease commitments
 
12,785

 
13,654

Other expenses
 
2,840

 
6,818

 
 
 
 
 
Operating earnings
 
30,979

 
25,305

 
 
 
 
 
Interest expense, net
 
76,098

 
72,083

 
 
 
 
 
Loss before income taxes
 
(45,119
)
 
(46,778
)
 
 
 
 
 
Income tax benefit
 
(18,902
)
 
(23,265
)
 
 
 
 
 
Net loss
 
$
(26,217
)
 
$
(23,513
)


See Notes to Condensed Consolidated Financial Statements.




2


NEIMAN MARCUS GROUP LTD LLC
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(UNAUDITED)
 
 
 
Thirteen weeks ended
(in thousands)
 
October 28,
2017
 
October 29,
2016
 
 
 
 
 
Net loss
 
$
(26,217
)
 
$
(23,513
)
 
 
 
 
 
Other comprehensive earnings:
 
 

 
 

Foreign currency translation adjustments, before tax
 
8,607

 
3,769

Change in unrealized gain on financial instruments, before tax
 
5,172

 
3,266

Reclassification of realized loss on financial instruments to earnings, before tax
 
1,216

 
591

Change in unrealized loss on unfunded benefit obligations, before tax
 
592

 
(6,367
)
Tax effect related to items of other comprehensive earnings
 
(5,190
)
 
(289
)
Total other comprehensive earnings
 
10,397

 
970

 
 
 
 
 
Total comprehensive loss
 
$
(15,820
)
 
$
(22,543
)
 
See Notes to Condensed Consolidated Financial Statements.


3


NEIMAN MARCUS GROUP LTD LLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
 
Thirteen weeks ended
(in thousands)
 
October 28,
2017
 
October 29,
2016
 
 
 
 
 
CASH FLOWS - OPERATING ACTIVITIES
 
 

 
 

Net loss
 
$
(26,217
)
 
$
(23,513
)
Adjustments to reconcile net loss to net cash used for operating activities:
 
 

 
 

Depreciation and amortization expense
 
86,294

 
90,304

Deferred income taxes
 
(14,591
)
 
(15,996
)
Payment-in-kind interest
 
14,362

 

Other
 
(1,232
)
 
(1,138
)
 
 
58,616

 
49,657

Changes in operating assets and liabilities:
 
 

 
 

Merchandise inventories
 
(185,484
)
 
(186,038
)
Other current assets
 
5,163

 
(14,825
)
Accounts payable and accrued liabilities
 
69,359

 
12,458

Deferred real estate credits
 
(660
)
 
7,701

Funding of defined benefit pension plan
 
(4,100
)
 

Net cash used for operating activities
 
(57,106
)
 
(131,047
)
 
 
 
 
 
CASH FLOWS - INVESTING ACTIVITIES
 
 

 
 

Capital expenditures
 
(24,660
)
 
(66,197
)
Net cash used for investing activities
 
(24,660
)
 
(66,197
)
 
 
 
 
 
CASH FLOWS - FINANCING ACTIVITIES
 
 

 
 

Borrowings under revolving credit facilities
 
191,793

 
270,000

Repayment of borrowings under revolving credit facilities
 
(110,891
)
 
(80,000
)
Repayment of borrowings under senior secured term loan facility
 
(7,357
)
 
(7,357
)
Debt issuance costs paid
 

 
(5,440
)
Net cash provided by financing activities
 
73,545

 
177,203

 
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
 
446

 
275

 
 
 
 
 
CASH AND CASH EQUIVALENTS
 
 

 
 

Decrease during the period
 
(7,775
)
 
(19,766
)
Beginning balance
 
49,239

 
61,843

Ending balance
 
$
41,464

 
$
42,077

 
 
 
 
 
Supplemental Schedule of Cash Flow Information
 
 

 
 

Cash paid (received) during the period for:
 
 

 
 

Interest
 
$
73,550

 
$
97,949

Income taxes
 
$
(3,552
)
 
$
(119
)
Non-cash - investing and financing activities:
 
 

 
 

Property and equipment acquired through developer financing obligations
 
$
2,077

 
$
14,763

Issuance of PIK Toggle Notes
 
$
28,500

 
$

See Notes to Condensed Consolidated Financial Statements.

4


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 omni-channel retailer conducting store and online operations principally under the Neiman Marcus, Bergdorf Goodman, Last Call 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.

The Company is a subsidiary of Mariposa Intermediate Holdings LLC ("Holdings"), which in turn is a subsidiary of Neiman Marcus Group, Inc., a Delaware corporation ("Parent"). Parent is owned by entities affiliated with Ares Management, L.P. and Canada Pension Plan Investment Board (together, the "Sponsors") and certain co-investors. The Sponsors acquired the Company on October 25, 2013 (the "Acquisition"). The Company's operations are conducted through its direct wholly owned subsidiary, The Neiman Marcus Group LLC ("NMG").

In October 2014, we acquired MyTheresa, a luxury retailer headquartered in Munich, Germany. The operations of MyTheresa are conducted primarily through the mytheresa.com website.

The accompanying Condensed Consolidated Financial Statements set forth financial information of the Company and its subsidiaries on a consolidated basis.  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 first quarter of fiscal year 2018 relate to the thirteen weeks ended October 28, 2017 and (ii) the first quarter of fiscal year 2017 relate to the thirteen weeks ended October 29, 2016.
 
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 July 29, 2017.  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 first quarter of fiscal year 2018 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 July 29, 2017.

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 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:

recognition of revenues;

5


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 intangible and 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 conduct our specialty retail store and online operations on an omni-channel basis. As our store and online operations have similar economic characteristics, products, services and customers, our operations constitute a single omni-channel reportable segment.
 
Newly Adopted Accounting Pronouncements. In March 2016, the Financial Accounting Standards Board ("the FASB") issued guidance to simplify how share-based payments are accounted for and presented in the financial statements, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. The standard allows (i) entities to withhold an amount up to the employees' maximum individual tax rate in the relevant jurisdiction without resulting in liability classification of the award and (ii) forfeitures to be either estimated, as required currently, or recognized when they occur. We adopted this guidance in the first quarter of fiscal year 2018. The adoption of this guidance did not have a material impact on our Condensed Consolidated Financial Statements.

Recent Accounting Pronouncements. In May 2014, the FASB issued guidance to clarify the principles for revenue recognition. The standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes previous revenue recognition guidance. While our evaluation of the impact of adopting this standard is ongoing, we believe the new guidance will impact our accounting for sales returns, our loyalty program and certain promotional programs. This new guidance is effective for us no earlier than the first quarter of fiscal year 2019. We are currently evaluating which application method to adopt.

In May 2017, the FASB issued guidance to clarify which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The standard requires modification accounting only if changes in the terms or conditions results in changes of the fair value, the vesting conditions or the classification of the award as an equity instrument or a liability. This new guidance is effective for us as of the first quarter of fiscal year 2019.

In February 2016, the FASB issued guidance that requires a lessee to recognize assets and liabilities arising from leases on the balance sheet. Previous GAAP did not require lease assets and liabilities to be recognized for most leases. Additionally, companies are permitted to make an accounting policy election not to recognize lease assets and liabilities for leases with a term of 12 months or less. For both finance leases and operating leases, the lease liability should be initially measured at the present value of the remaining contractual lease payments. The recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee will not significantly change under this new guidance. This new guidance is effective for us as of the first quarter of fiscal year 2020.

In August 2017, the FASB issued guidance to simplify how hedge accounting arrangements are accounted for and presented in the financial statements, including the assessment of hedge effectiveness. Under the new standard, all changes in the value of the hedging instrument included in the assessment of effectiveness will be recorded in other comprehensive income and reclassified to earnings in the same income statement line item when the hedged item affects earnings. This new guidance is effective for us as of the first quarter of fiscal year 2020.

With respect to the recent accounting pronouncements described above, we are currently evaluating the impact of adopting these new accounting standards on our Condensed Consolidated Financial Statements.


2. Fair Value Measurements
 
Certain of our assets and liabilities are required to be measured at fair value on a recurring basis. 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

6


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 and liabilities that are required to be measured at fair value on a recurring basis in our Condensed Consolidated Balance Sheets:
(in thousands)
 
Fair Value
Hierarchy
 
October 28,
2017
 
July 29,
2017
 
October 29,
2016
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
Interest rate swaps (included in other long-term assets)
 
Level 2
 
$
11,363

 
$
3,628

 
$

 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Interest rate swaps (included in other long-term liabilities)
 
Level 2
 
$

 
$

 
$
10,523

Contingent earn-out obligation (included in accrued liabilities)
 
Level 3
 

 

 
25,454

Stock-based award liability (included in other long-term liabilities)
 
Level 3
 
5,166

 
1,344

 
4,364

 
The fair value of the interest rate swaps is estimated using industry standard valuation models using market-based observable inputs, including interest rate curves. 

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 based upon the forecasted operating performance of MyTheresa and a discount rate that captured the risk associated with the obligation. We updated our assumptions based on new developments and adjusted the carrying value of the obligation to its estimated fair value at each reporting date. In March 2017, we paid $26.9 million, or €25.5 million, to the sellers related to calendar year 2016 (of which $22.9 million, or €18.1 million, represented the acquisition date fair value of the obligation). The Company has no further earn-out obligations.

Because Parent is privately held and there is no public market for its common stock, the fair market value of Parent's common stock is determined by the Board of Directors of Parent (the "Parent Board") or the Compensation Committee, as applicable.  In determining the fair market value of Parent's common stock, the Parent Board or the Compensation Committee, as applicable, considers such factors as any recent transactions involving Parent's common stock, the Company’s actual and projected financial results, the principal amount of the Company’s indebtedness, valuations of the Company performed by third parties and other factors it believes are material to the valuation process. Significant inputs to the common stock valuation model are updated as applicable and the carrying value of the obligation is adjusted to its estimated fair value at each reporting date.


7


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:
 
 
 
 
October 28, 2017
 
July 29, 2017
 
October 29, 2016
(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
 
$
339,000

 
$
339,000

 
$
263,000

 
$
263,000

 
$
355,000

 
$
355,000

Senior Secured Term Loan Facility
 
Level 2
 
2,832,276

 
2,264,065

 
2,839,633

 
2,113,766

 
2,861,703

 
2,639,921

mytheresa.com Credit Facilities
 
Level 2
 
4,869

 
4,869

 

 

 

 

Cash Pay Notes
 
Level 2
 
960,000

 
583,450

 
960,000

 
532,253

 
960,000

 
798,240

PIK Toggle Notes
 
Level 2
 
628,500

 
342,922

 
600,000

 
297,000

 
600,000

 
474,000

2028 Debentures
 
Level 2
 
122,731

 
79,375

 
122,677

 
87,490

 
122,517

 
116,191


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 asset-based revolving credit facility (as amended, the "Asset-Based Revolving Credit Facility") and the 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") and (ii) quoted market prices of the same or similar issues for the $960.0 million aggregate principal amount of 8.00% Senior Cash Pay Notes due 2021 (the "Cash Pay Notes"), the $628.5 million aggregate principal amount of 8.75%/9.50% Senior PIK Toggle Notes due 2021 (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 adjusted the carrying values of our long-lived and intangible assets to their estimated fair values at the acquisition date. The fair value estimates were 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). Subsequent to the Acquisition, we determine the fair value of our long-lived and intangible assets on a non-recurring basis in connection with our periodic evaluations of such assets for potential impairment and record impairment charges when such fair value estimates are lower than the carrying values of the assets.


3. Intangible Assets, Net and Goodwill
 
(in thousands)
 
October 28,
2017
 
July 29,
2017
 
October 29,
2016
 
 
 
 
 
 
 
Favorable lease commitments, net
 
$
917,800

 
$
930,585

 
$
971,880

Other definite-lived intangible assets, net
 
389,081

 
401,081

 
438,234

Tradenames
 
1,502,134

 
1,499,750

 
1,808,468

Intangible assets, net
 
$
2,809,015

 
$
2,831,416

 
$
3,218,582

 
 
 
 
 
 
 
Goodwill
 
$
1,885,391

 
$
1,880,894

 
$
2,075,122


Intangible Assets Subject to Amortization. Favorable lease commitments are amortized straight-line over the remaining lives of the leases, ranging from five to 55 years (weighted average life of 30 years) from the Acquisition date. 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 six to 16 years (weighted average life of 13 years) from the respective acquisition dates. 


8


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):
October 29, 2017 through July 28, 2018
$
72,793

2019
94,997

2020
88,301

2021
82,323

2022
82,473

2023
82,028


At October 28, 2017, accumulated amortization was $213.2 million for favorable lease commitments and $312.1 million for other definite-lived intangible assets.

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 annually in the fourth quarter of each fiscal year and upon the occurrence of certain events. These impairment assessments are performed for each of our three reporting units — Neiman Marcus, Bergdorf Goodman and MyTheresa.


4. Impairment Charges

We recorded impairment charges aggregating $510.7 million in fiscal year 2017 ($153.8 million in the second quarter and $357.0 million in the fourth quarter). These impairment charges were driven both by (i) changes in market conditions related to increases in the weighted average cost of capital and valuation multiples and (ii) deterioration of operating trends during such periods. These impairment charges related to certain of our tradenames, goodwill and long-lived assets primarily associated with our Neiman Marcus and Bergdorf Goodman brands.


5. Long-term Debt
 
The significant components of our long-term debt are as follows:
(in thousands)
 
Interest
Rate
 
October 28,
2017
 
July 29,
2017
 
October 29,
2016
 
 
 
 
 
 
 
 
 
Asset-Based Revolving Credit Facility
 
variable
 
$
339,000

 
$
263,000

 
$
355,000

Senior Secured Term Loan Facility
 
variable
 
2,832,276

 
2,839,633

 
2,861,703

mytheresa.com Credit Facilities
 
2.25%/2.39%
 
4,869

 

 

Cash Pay Notes
 
8.00%
 
960,000

 
960,000

 
960,000

PIK Toggle Notes
 
8.75%/9.50%
 
628,500

 
600,000

 
600,000

2028 Debentures
 
7.125%
 
122,731

 
122,677

 
122,517

Total debt
 
 
 
4,887,376

 
4,785,310

 
4,899,220

Less: current portion of Senior Secured Term Loan Facility
 
 
 
(29,426
)
 
(29,426
)
 
(29,426
)
Less: unamortized debt issuance costs
 
 
 
(74,726
)
 
(80,344
)
 
(97,198
)
Long-term debt, net of debt issuance costs
 
 
 
$
4,783,224

 
$
4,675,540

 
$
4,772,596

Asset-Based Revolving Credit Facility.  At October 28, 2017, we have an Asset-Based Revolving Credit Facility with a maximum committed borrowing capacity of $900.0 million.  The Asset-Based Revolving Credit Facility matures on July 25, 2021 (or July 25, 2020 if our obligations under our Senior Secured Term Loan Facility or any permitted refinancing thereof have not been repaid or the maturity date thereof has not been extended to October 25, 2021 or later). At October 28, 2017, we had outstanding borrowings of $339.0 million under this facility, outstanding letters of credit of $1.8 million and unused commitments of $559.3 million, subject to a borrowing base, of which $90.0 million of such capacity is available to us subject to certain restrictions as more fully described below.
 
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

9


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 minimum fixed charge coverage ratio. Additional restrictions will apply if this condition is not met for five consecutive business days, including increased reporting requirements and additional administrative agent control rights over certain of our accounts. These restrictions will continue until the condition is satisfied and their imposition may limit our operational flexibility.

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 $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 October 28, 2017, 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 of 0.75% with respect to base rate borrowings and 1.75% with respect to LIBOR borrowings at October 28, 2017.  The applicable margin is based on the average historical excess availability under the Asset-Based Revolving Credit Facility, and is up to 1.00% with respect to base rate borrowings and up to 2.00% with respect to LIBOR borrowings, in each case with one 0.25% step down based on achievement and maintenance of a certain senior secured first lien net leverage ratio (as defined in the credit agreement governing the Asset-Based Revolving Credit Facility).  The weighted average interest rate on the outstanding borrowings pursuant to the Asset-Based Revolving Credit Facility was 3.20% at October 28, 2017.  In addition, we are required to pay a commitment fee in respect of unused commitments at a rate of up to 0.375% per annum.  We must also pay customary letter of credit fees and agency fees.

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 July 25, 2021 (or July 25, 2020 if our obligations under our Senior Secured Term Loan Facility or any permitted refinancing thereof have not been repaid or the maturity date thereof has not been extended to October 25, 2021 or later).
 
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 October 28, 2017, the assets of non-guarantor subsidiaries, primarily (i) NMG Germany GmbH, through which we conduct the operations of MyTheresa, (ii) NMG International LLC, a holding company with respect to our foreign operations and (iii) Nancy Holdings LLC, which holds legal title to certain real property used by us in conducting our operations, aggregated $422.1 million, or 5.4% 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

10


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 8 of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended July 29, 2017.
 
Senior Secured Term Loan Facility.  We have a credit agreement and related security and other agreements for the $2,950.0 million Senior Secured Term Loan Facility. At October 28, 2017, the outstanding balance under the Senior Secured Term Loan Facility was $2,832.3 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.

At October 28, 2017, 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 October 28, 2017.  The interest rate on the outstanding borrowings pursuant to the Senior Secured Term Loan Facility was 4.49% at October 28, 2017.
 
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 ended July 26, 2015) must be used to prepay outstanding term loans under the 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 2017.
 
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 of $7.4 million, less certain voluntary and mandatory prepayments, with the remaining balance due at final maturity.
 
The 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. At October 28, 2017, the assets of non-guarantor subsidiaries, primarily (i) NMG Germany GmbH, through which we conduct the operations of MyTheresa, (ii) NMG International LLC, a holding company with respect to our foreign operations and (iii) Nancy Holdings LLC, which holds legal title to certain real property used by us in conducting our operations, aggregated $422.1 million, or 5.4% of consolidated total assets. All obligations under the Senior Secured Term Loan 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.

11


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 8 of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended July 29, 2017.
 
Mytheresa.com Credit Facilities. Our subsidiary mytheresa.com GmbH, through which we operate mytheresa.com, is party to two credit facility agreements (the "mytheresa.com Credit Facilities"). The first facility, entered into October 1, 2015, is a revolving credit line for up to €6.5 million in availability and bears interest at a fixed rate of 2.39% (until further notice) for any loan drawn under the overdraft facility and at rates to be agreed on a case-by-case basis for money market loans and guarantees. The second facility, entered into June 8, 2017, is a revolving credit line for up to €8.5 million in availability and bears interest at a fixed rate of 2.25% (until further notice) for any loan drawn under the overdraft facility and at rates to be agreed on a case-by-case basis for any other loans.
Both facilities are secured by certain inventory held by mytheresa.com GmbH and certain contractual claims. The facilities are not guaranteed by, and are non-recourse to, us or any of our U.S. subsidiaries or affiliates. Each facility contains restrictive covenants prohibiting mytheresa.com GmbH from distributing or making available loan proceeds to any affiliates including us or any of our other subsidiaries and requiring mytheresa.com GmbH to maintain a minimum economic equity ratio. The agreements also contain usual and customary events of default, the occurrence of which may result in all outstanding amounts under the facility agreements becoming due and payable immediately. There is no scheduled amortization under either facility and neither facility has a specified maturity date. However, each lender may terminate its respective facility at any time provided that mytheresa.com GmbH is given a customary reasonable opportunity to secure alternative financing.
As of October 28, 2017, mytheresa.com GmbH had outstanding borrowings of $4.9 million, or €4.1 million, guarantees of $1.3 million, or €1.1 million, and unused commitments of $11.6 million, or €9.8 million.
Cash Pay Notes.  The Company, along with Mariposa Borrower, Inc. as co-issuer, 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.  At October 28, 2017, the redemption price at which we may redeem the Cash Pay Notes, in whole or in part, as set forth in the indenture governing the Cash Pay Notes, was 104.000%. The Cash Pay Notes mature on October 15, 2021.

For a more detailed description of the Cash Pay Notes, refer to Note 8 of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended July 29, 2017.

PIK Toggle Notes.  The Company, along with Mariposa Borrower, Inc. as co-issuer, incurred indebtedness in the form of $600.0 million aggregate principal amount of 8.75%/9.50% Senior PIK Toggle Notes due 2021. At October 28, 2017, the outstanding balance under the PIK Toggle Notes was $628.5 million. 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. At October 28, 2017, the redemption price at which we may redeem the PIK Toggle Notes, in whole or in part, as set forth in the indenture governing the PIK Toggle Notes, was 104.375%. 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, subject to certain restrictions, 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 payment amount ("PIK Interest"), or (iii) 50% in Cash Interest and 50% in PIK Interest. 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. Interest on the PIK Toggle Notes was paid entirely in cash for the first seven interest payments. We elected to pay the October 2017 and April 2018 interest payments in the form of PIK Interest, which resulted in the issuance of $28.5 million of additional PIK Toggle Notes in October 2017 and will result in the issuance of $29.9 million of additional PIK Toggle Notes in April 2018. We may additionally elect to pay interest in the form of PIK Interest or partial PIK Interest with respect to the interest payment due in October 2018. If we elect to do so, we must deliver a notice of such election to the trustee no later than one day prior to the beginning of the October 2018 interest period. We will evaluate our financial position prior to the October 2018 interest period to determine the appropriate election at that time.

For a more detailed description of the PIK Toggle Notes, refer to Note 8 of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended July 29, 2017.

12


2028 Debentures.  NMG has 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 October 28, 2017, our non-guarantor subsidiaries consisted principally of (i) Bergdorf Goodman, Inc., through which we conduct the operations of our Bergdorf Goodman stores; (ii) NM Nevada Trust, which holds legal title to certain real property and intangible assets used by us in conducting our operations; (iii) NMG Germany GmbH, through which we conduct the operations of MyTheresa; (iv) NMG International LLC, a holding company with respect to our foreign operations; and (v) Nancy Holdings LLC, which holds legal title to certain real property used by us in conducting our operations.  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 8 of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended July 29, 2017.

Maturities of Long-term Debt.  At October 28, 2017, annual maturities of long-term debt during the current and next five fiscal years and thereafter are as follows (in millions):
October 29, 2017 through July 28, 2018
$
22.1

2019
29.4

2020
29.4

2021
3,090.4

2022
1,588.5

2023

Thereafter
127.6


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, net.  The significant components of interest expense are as follows:
 
 
Thirteen weeks ended
(in thousands)
 
October 28,
2017
 
October 29,
2016
 
 
 
 
 
Asset-Based Revolving Credit Facility
 
$
2,313

 
$
1,204

Senior Secured Term Loan Facility
 
33,418

 
31,444

mytheresa.com Credit Facilities
 
21

 
15

Cash Pay Notes
 
19,200

 
19,200

PIK Toggle Notes
 
14,362

 
13,125

2028 Debentures
 
2,227

 
2,227

Amortization of debt issue costs
 
6,117

 
6,143

Capitalized interest
 
(1,723
)
 
(1,715
)
Other, net
 
163

 
440

Interest expense, net
 
$
76,098

 
$
72,083



6. Derivative Financial Instruments
 
Interest Rate Swaps. At October 28, 2017, we had outstanding floating rate debt obligations of $3,171.3 million. In April and June of 2016, we entered into floating to fixed interest rate swap agreements for an aggregate notional amount of $1,400.0 million to limit our exposure to interest rate increases related to a portion of our floating rate indebtedness. These swap agreements hedge a portion of our contractual floating rate interest commitments related to our Senior Secured Term Loan Facility from December 2016 to October 2020. As a result of the April 2016 swap agreements, our effective interest rate as to $700.0 million of floating rate indebtedness will be fixed at 4.9120% from December 2016 through October 2020. As a result of the June 2016 swap agreements, our effective interest rate as to an additional $700.0 million of floating rate indebtedness will be fixed at 4.7395% from December 2016 to October 2020. The fair value of our interest rate swap agreements was a gain of $11.4 million at October 28, 2017 and a gain of $3.6 million at July 29, 2017, which amounts were included in other long-term assets, and a loss of $10.5 million at

13


October 29, 2016, which amount is included in other long-term liabilities. The interest rate swap agreements expire in October 2020.

We designated the interest rate swaps as cash flow hedges. As cash flow hedges, unrealized gains on our outstanding interest rate swaps are recognized as assets while unrealized losses are recognized as liabilities. Our interest rate swap agreements are highly, but not perfectly, correlated to the changes in interest rates to which we are exposed. As a result, unrealized gains and losses on our interest rate swap agreements are designated as effective or ineffective. The effective portion of such gains or losses will be recorded as a component of accumulated other comprehensive loss while the ineffective portion of such gains or losses will be recorded as a component of interest expense.

In addition, we realize a gain or loss on our interest rate swap agreements in connection with each required interest payment on our floating rate indebtedness. The realized gains or losses effectively adjust the contractual interest requirements pursuant to the terms of our floating rate indebtedness to the interest requirements at the fixed rates established in the interest rate swap agreements. These realized gains or losses are reclassified to interest expense from accumulated other comprehensive loss.

Interest Rate Caps. 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 effectively capped LIBOR related to our Senior Secured Term Loan Facility at 3.00% from December 2014 through December 2016 with respect to the $1,400.0 million notional amount of such agreements. The interest rate cap agreements expired in December 2016. Gains and losses realized due to the expiration of applicable portions of the interest rate caps were reclassified to interest expense at the time our quarterly interest payments were made.

A summary of the recorded amounts related to our interest rate swaps and interest rate caps reflected in our Condensed Consolidated Statements of Operations is as follows:
 
 
Thirteen weeks ended
(in thousands)
 
October 28,
2017
 
October 29,
2016
 
 
 
 
 
Realized hedging losses related to interest rate swaps – included in net interest expense
 
$
1,216

 
$

Realized hedging losses related to interest rate caps – included in net interest expense
 

 
591

Total
 
$
1,216

 
$
591


The amount of net losses recorded in other comprehensive loss at October 28, 2017 that is expected to be reclassified into interest expense in the next 12 months, if interest rates remain unchanged, is approximately $0.8 million.


7. Income Taxes
 
Our effective income tax rates are as follows:
 
 
Thirteen weeks ended
 
 
October 28,
2017
 
October 29,
2016
 
 

 

Effective income tax rate
 
41.9
%
 
49.7
%

Our effective income tax rate on the loss for the first quarter of fiscal year 2018 exceeded the federal statutory tax rate of 35% due primarily to state and foreign income taxes.


14


Our effective income tax rate on the loss for the first quarter of fiscal year 2017 exceeded the federal statutory tax rate due primarily to:

state income taxes;
the non-deductible portion of transaction and other costs incurred in connection with the MyTheresa acquisition; and
the benefit associated with the release of certain tax reserves for settled tax matters.

At October 28, 2017, 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 $0.4 million at October 28, 2017, $0.4 million at July 29, 2017 and $0.1 million at October 29, 2016.

We file income tax returns in the U.S. federal jurisdiction and various state, local and foreign jurisdictions.  The Internal Revenue Service ("IRS") finalized its audits of our fiscal year 2012 and short-year 2013 (prior to the Acquisition) 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 2013.  We believe our recorded tax liabilities as of October 28, 2017 are sufficient to cover any potential assessments made by the IRS or other taxing authorities 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 adjustments to the amounts of our unrecognized tax benefits could occur within the next 12 months as a result of settlements with tax authorities or expiration of statutes of limitations.  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 incurred by Parent are reflected by the Company and its subsidiaries in the preparation of our Condensed Consolidated Financial Statements. There are no differences in current and deferred income taxes between the Company and Parent.


8. 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") that 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.
Our obligations for employee benefit plans, included in other long-term liabilities, are as follows:
(in thousands)
 
October 28,
2017
 
July 29,
2017
 
October 29,
2016
 
 
 
 
 
 
 
Pension Plan
 
$
236,229

 
$
240,737

 
$
303,504

SERP Plan
 
111,596

 
112,739

 
120,325

Postretirement Plan
 
6,537

 
6,916

 
8,404

 
 
354,362

 
360,392

 
432,233

Less: current portion
 
(6,679
)
 
(7,803
)
 
(6,553
)
Long-term portion of benefit obligations
 
$
347,683

 
$
352,589

 
$
425,680

 
Funding Policy and Status.  Our policy is to fund the Pension Plan at or above the minimum level required by law. As of October 28, 2017, we believe we will be required to contribute $25.1 million to the Pension Plan in fiscal year 2018, of which $4.1 million was funded during the first quarter of fiscal year 2018. In fiscal year 2017, we were required to contribute $10.7 million to the Pension Plan.


15


Cost of Benefits. The components of the expenses we incurred under our Pension Plan, SERP Plan and Postretirement Plan are as follows:
 
 
Thirteen weeks ended
(in thousands)
 
October 28,
2017
 
October 29,
2016
 
 
 
 
 
Pension Plan:
 
 

 
 

Interest cost
 
$
4,973

 
$
4,870

Expected return on plan assets
 
(5,396
)
 
(5,331
)
Net amortization of losses
 
170

 
663

Pension Plan expense (income)
 
$
(253
)
 
$
202

 
 
 
 
 
SERP Plan:
 
 

 
 

Interest cost
 
$
844

 
$
784

Net amortization of losses
 

 
23

SERP Plan expense
 
$
844

 
$
807

 
 
 
 
 
Postretirement Plan:
 
 

 
 

Interest cost
 
$
51

 
$
55

Net amortization of gains
 
(180
)
 
(146
)
Postretirement Plan income
 
$
(129
)
 
$
(91
)


9. Commitments and Contingencies
 
Employment, Consumer and Benefits Class Actions Litigation.  In 2007, Bernadette Tanguilig filed a lawsuit in the Superior Court of California for San Francisco County alleging wrongful termination and retaliation arising from her refusal to sign the Company’s mandatory arbitration agreement. Ms. Tanguilig later filed several amendments to her complaint adding claims under the California Labor Code Private Attorneys General Act ("PAGA") and class action allegations of wage and hour violations. She also added Juan Carlos Pinela as an additional plaintiff. In December 2013, the Company filed a motion to dismiss Ms. Tanguilig’s claims based on her failure to bring her claims to trial within five years as required by California law. In February 2014, the Company’s motion was granted and Ms. Tanguilig’s claims were dismissed. Ms. Tanguilig appealed. Briefing is complete, and a judicial panel has been assigned. The parties have requested oral argument, but no date has been set.

In October 2011, the court ordered Mr. Pinela (a co-plaintiff in the Tanguilig case) to arbitrate his claims in accordance with the mandatory arbitration agreement. Mr. Pinela filed a demand for arbitration seeking to arbitrate both his individual and class claims, which the Company argued was in violation of the class action waiver in the arbitration agreement. This led to further proceedings in the trial court, a stay of the arbitration, and a decision by the trial court to reconsider and vacate its order compelling arbitration, which the Company appealed. In June 2015, the appellate court upheld the trial court’s denial of the Company’s motion to compel arbitration of Mr. Pinela’s claims. The Company’s petition for rehearing by the appellate court and petition for review by the California Supreme Court were denied, and the case was returned to the trial court. On December 10, 2015, the trial court issued a stay of the case pending the conclusion of the Tanguilig appeal, which remains in effect.
    
We recorded our currently estimable liabilities with respect to Ms. Tanguilig's employment class action litigation claims in fiscal year 2014, which amount was not material to our financial condition or results of operations. We will continue to evaluate the Tanguilig matter, and our recorded reserve for such matter, based on subsequent events, new information and future circumstances.

The National Labor Relations Board ("NLRB") has been pursuing a complaint alleging that the Mandatory Arbitration Agreement’s class action prohibition violates employees’ rights to engage in concerted activity. The administrative law judge issued a recommended decision and order finding that the Company's Arbitration Agreement and class action waiver violated the National Labor Relations Act, which were affirmed by the NLRB in August 2015. On August 12, 2015, we filed our petition for review of the NLRB's order with the U.S. Court of Appeals for the Fifth Circuit. This case is stayed while another similar case is pending before the U.S. Supreme Court.

On August 7, 2014, a putative class action complaint was filed against The Neiman Marcus Group LLC in Los Angeles County Superior Court by a customer, Linda Rubenstein, in connection with the Company's Last Call stores in California. Ms. Rubenstein alleges that the Company has violated various California consumer protection statutes by implementing a marketing and pricing

16


strategy that suggests that clothing sold at Last Call stores in California was originally offered for sale at full-line Neiman Marcus stores when allegedly, it was not, and that the Company lacks adequate information to support its comparative pricing labels. In September 2014, we removed the case to the U.S. District Court for the Central District of California. After dismissing Ms. Rubenstein’s original and first amended complaint, the court dismissed her second amended complaint in its entirety in May 2015, without leave to amend, and Ms. Rubenstein appealed. In April 2017, the Court of Appeal reversed, holding that Ms. Rubenstein’s allegations were sufficient to proceed past the pleadings stage of litigation. The case has been transferred back to the district court and has a trial date of July 24, 2018. On September 7, 2017, the district court issued an order permitting Ms. Rubenstein to file a proposed Third Amended Complaint, which modifies the putative class period. Additionally, Ms. Rubenstein filed a motion for class certification, which is currently set for hearing on December 18, 2017.
  
The Company has several wage and hour putative class action matters pending in California. The earliest, filed in December 2015 and amended in February 2016, was filed against The Neiman Marcus Group, Inc. by Holly Attia and seven other named plaintiffs, seeking to certify a class of nonexempt employees for alleged violations for failure to pay overtime wages, failure to provide meal and rest breaks, failure to reimburse business expenses, failure to timely pay wages due at termination and failure to provide accurate itemized wage statements. Plaintiffs also allege derivative claims for restitution under California unfair competition law and a representative claim for penalties under PAGA, and all related damages for alleged violations (restitution, statutory penalties under PAGA, and attorneys' fees, interest and costs of suit). The case was removed to the U.S. District Court for the Central District of California in March 2016, and the Company filed a motion to compel arbitration and requested to stay the PAGA claim. In June 2016, the court granted the motion and compelled arbitration of the individual claims. The court retained jurisdiction of the PAGA claim and stayed that claim pending the outcome of arbitration. In October 2016, the court granted the plaintiffs' motion for reconsideration of the arbitration decision based on a recent decision by the Ninth Circuit Court of Appeals in Morris v. Ernst & Young, LLP, and reversed its order compelling arbitration. The Company appealed. The U.S. Supreme Court granted certiorari of the Morris decision, and the Ninth Circuit appeal is currently stayed pending the Supreme Court's decision. In June 2017, the district court stayed the entire case pending the Supreme Court’s decision in Morris.

On June 1, 2016, a PAGA representative action was filed against The Neiman Marcus Group, Inc. in the same court as Attia by Xuan Hien Nguyen pleading only PAGA claims and asserting the same factual allegations as the plaintiffs in Attia. The Company filed a motion to dismiss or to stay the case. In September 2016, the court granted the Company's motion and stayed the Nguyen case in light of Attia. At a status conference on November 8, 2017, the court maintained the stay and set a further status conference for January 29, 2018.

On July 28, 2016, former employee Milca Connolly also filed a representative action alleging only PAGA claims against The Neiman Marcus Group raising substantially identical claims to those raised in both Attia and Nguyen. The Company filed a motion to dismiss or stay the case in light of Attia and Nguyen. In November 2016, the court granted the Company's motion to stay the case. At a status conference on November 8, 2017, the court maintained the stay and set a further status conference for January 29, 2018.

On September 27, 2016, a dormant Illinois putative class action lawsuit, Catherine Ohle v. Neiman Marcus Group, originally filed in the Circuit Court of Cook County, was revived by an Illinois appeals court when it reversed a June 2014 trial court's order granting summary judgment to the Company and dismissing the matter in its entirety. In Ohle, the plaintiff alleged that the Company’s prior practice of conducting pre-employment credit checks of sales associates and considering credit history as a factor in its hiring decisions violated the Illinois Employee Credit Privacy Act. The appellate court reversed, holding that no exemption applied. The Company appealed the decision to the Illinois Supreme Court, and review was denied on January 25, 2017. The case was returned to the trial court for further proceedings. On September 19, 2017, the court granted final approval of a class settlement. The class settlement has been funded and the proceeds have been distributed to the class members. Any class proceeds that are uncashed or unable to be distributed will be provided to two charities designated by Neiman Marcus.

On October 24, 2017, a putative class action complaint was filed against The Neiman Marcus Group LLC and the Company’s Health and Welfare Benefit Plan in the U.S. District Court for the Western District of Washington by a Plan beneficiary alleging violations of the Federal Mental Health Parity Act and the Affordable Care Act through the Employment Retirement Income Security Act of 1974 (“ERISA”) in connection with the alleged failure to cover particular treatments for developmental health conditions. We cannot assess any potential liability at this early stage of the proceedings.

On October 27, 2017, a putative class action complaint was filed against Neiman Marcus Group, Inc., The Neiman Marcus Group LLC, and Bergdorf Goodman, Inc. in the U.S. District Court for the Southern District of New York by Victor Lopez, an allegedly visually-impaired and legally blind individual, in connection with his visits to Bergdorf Goodman, Inc.’s website. Mr. Lopez alleges, on behalf of himself and those similarly situated, that Bergdorf Goodman, Inc.’s website is not fully and equally accessible

17


to legally blind individuals, resulting in denial of access to the equal enjoyment of goods and services, in violation of the Americans with Disabilities Act and the New York State and City Human Rights Laws.

In addition, we are currently involved in various other legal actions and proceedings that arose in the ordinary course of business. With respect to the matters described above as well as all other current outstanding litigation involving us, we believe that any liability arising as a result of such litigation will not have a material adverse effect on our financial condition, results of operations or cash flows.

Cyber-Attack Class Actions Litigation. In January 2014, three class actions relating to a cyber-attack on our computer systems in 2013 (the "Cyber-Attack") were filed and later voluntarily dismissed by the plaintiffs between February and April 2014. The plaintiffs had alleged negligence and other claims in connection with their purchases by payment cards and sought monetary and injunctive relief. Three additional putative class actions relating to the Cyber-Attack were filed in March and April 2014, also alleging negligence and other claims in connection with plaintiffs’ purchases by payment cards. Two of the cases were voluntarily dismissed. The third case, Hilary Remijas v. The Neiman Marcus Group, LLC, was filed on March 12, 2014 in the U.S. District Court for the Northern District of Illinois. On June 2, 2014, an amended complaint in the Remijas case was filed, which added three plaintiffs (Debbie Farnoush and Joanne Kao, California residents; and Melissa Frank, a New York resident) and asserted claims for negligence, implied contract, unjust enrichment, violation of various consumer protection statutes, invasion of privacy and violation of state data breach laws. The Company moved to dismiss the Remijas amended complaint, and the court granted the Company's motion on the grounds that the plaintiffs lacked standing due to their failure to demonstrate an actionable injury. Plaintiffs appealed the district court's order dismissing the case to the Seventh Circuit Court of Appeals, and the Seventh Circuit Court of Appeals reversed the district court's ruling, remanding the case back to the district court. The Company filed a petition for rehearing en banc, which the Seventh Circuit Court of Appeals denied. The Company filed a motion for dismissal on other grounds, which the court denied. The parties jointly requested, and the court granted, an extension of time for filing a responsive pleading, which was due on December 28, 2016. On February 9, 2017, the court denied the parties' request for another extension of time, dismissed the case without prejudice, and stated that plaintiffs could file a motion to reinstate. On March 8, 2017, plaintiffs filed a motion to reinstate, which the court granted on March 16, 2017. On March 17, 2017, plaintiffs filed a motion seeking preliminary approval of a class action settlement resolving this action, which the court granted on June 21, 2017. On August 21, 2017, plaintiffs moved for final approval of the proposed settlement. In September 2017, purported settlement class members filed two objections to the settlement, and plaintiffs and the Company filed responses to the objections on October 19, 2017. At the fairness hearing on October 26, 2017, the Court ordered supplemental briefing on the objections. Objectors filed a supplemental brief in support of their objections on November 9, 2017, and plaintiffs and the Company filed their supplemental responses to the objections on November 21, 2017. The Court has advised that it intends to rule in writing on plaintiffs’ motion for final approval of the settlement.

In addition to class actions litigation, payment card companies and associations may require us to reimburse them for unauthorized card charges and costs to replace cards and may also impose fines or penalties in connection with the security incident, and enforcement authorities may also impose fines or other remedies against us. We have also incurred other costs associated with this security incident, including legal fees, investigative fees, costs of communications with customers and credit monitoring services provided to our customers. At this point, we are unable to predict the developments in, outcome of, and economic and other consequences of pending or future litigation or regulatory investigations related to, and other costs associated with, this matter. We will continue to evaluate these matters based on subsequent events, new information and future circumstances.

Other.  We had $1.8 million of irrevocable letters of credit and $3.3 million in surety bonds outstanding at October 28, 2017, relating primarily to merchandise imports and state sales tax and utility requirements.
 

18


10. 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 Gains
on
Financial
Instruments
 
Unfunded
Benefit
Obligations
 
Total
 
 
 
 
 

 
 

 
 

Balance, July 29, 2017
 
$
(11,600
)
 
$
3,394

 
$
(55,225
)
 
$
(63,431
)
Other comprehensive earnings
 
6,154

 
3,144

 
360

 
9,658

Amounts reclassified from accumulated other comprehensive loss
 

 
739

 

 
739

Balance, October 28, 2017
 
$
(5,446
)
 
$
7,277

 
$
(54,865
)
 
$
(53,034
)
 
The amounts reclassified from accumulated other comprehensive loss are recorded within interest expense on the Condensed Consolidated Statements of Operations.


11. Stock-Based Awards
 
Incentive Plans.  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 pre-Acquisition stock options into stock options of Parent representing options to purchase 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 pre-Acquisition stock options was equal to the product of (a) the number of shares subject to the applicable pre-Acquisition 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 pre-Acquisition stock option was adjusted by dividing the original exercise price of the pre-Acquisition 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 aggregate intrinsic value of the rolled over pre-Acquisition 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 pre-Acquisition options.  The Co-Invest Options contain sale and repurchase provisions.

In September 2017, the Compensation Committee approved grants of non-qualified Co-Invest Options (the “New Co-Invest Options”) to certain continuing employees who previously held Co-Invest Options. The New Co-Invest Options have the effect of replacing the previous Co-Invest Options held by those employees, which were cancelled, and extending the expiration date to the tenth anniversary of the grant date. All other terms of the New Co-Invest Options remain unchanged from the terms of the cancelled Co-Invest Options. In the first quarter of fiscal year 2018, we recorded non-cash stock compensation expense aggregating $4.2 million related to the cancellation and replacement of the previous Co-Invest Options with the New Co-Invest Options.

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, employees and non-employee directors of the Company. These non-qualified stock options will expire no later than the tenth anniversary of the grant date.

In September 2016, the Compensation Committee determined that the exercise prices of certain time-vested and performance-vested stock options were higher than the current fair market value of Parent's common stock. In order to enhance the retentive value of these options, the Compensation Committee approved (1) a repricing of 18,225 time-vested and performance-vested stock options to an exercise price of $1,000 per share and (2) modifications to the performance metrics applicable to all performance-vested stock options.


19


Accounting for Stock Options. Prior to an initial public offering ("IPO"), in the event the optionee ceases to be an employee of the Company, Parent generally has the right to repurchase shares issued upon exercise of vested stock options at fair market value and shares underlying vested unexercised stock options for the difference between the fair market value of the underlying share on the date of such optionee's termination of employment and the exercise price. However, other than with respect to the Co-Invest Options, if the optionee voluntarily leaves the Company without good reason (as defined in the incentive plans) 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. For certain optionees, 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, including with respect to the Co-Invest Options.

We currently account for stock options issued to certain optionees who will become retirement eligible prior to the expiration of their stock options ("Retirement Eligible Optionees") as variable awards using the liability method as these optionees could receive a cash settlement of their awards at the time of retirement should Parent exercise its repurchase rights with respect to such shares. Under the liability method, we recognize the estimated liability for option awards held by Retirement Eligible Optionees over the vesting periods of such awards. In periods in which the estimated fair value of our equity increases, we increase our stock compensation liability. Conversely, in periods in which the estimated fair value of our equity decreases, we reduce our stock compensation liability. These increases/decreases are recorded as stock compensation expense and are included in selling, general and administrative expenses. With respect to time-vested options held by non-Retirement Eligible Optionees, such options are effectively forfeited should the optionee voluntarily leave the Company without good reason or be terminated for cause prior to an IPO. As a result, we currently record no expense or liability with respect to such options. With respect to performance-vested options, such options are effectively forfeited should the optionee voluntarily leave the Company without good reason or be terminated for cause prior to achievement of the performance condition. As a result, we currently record no expense or liability with respect to such options.

At October 28, 2017, an aggregate of 67,395 Co-Invest Options and time-vested options were held by Retirement Eligible Optionees. The recorded liability with respect to such options was $3.7 million at October 28, 2017, $0.2 million at July 29, 2017 and $4.4 million at October 29, 2016.

The following table sets forth certain summary information with respect to our stock options for the periods indicated:
 
 
Thirteen weeks ended October 28, 2017
(in actuals)
 
Shares
 
Weighted
Average
Exercise
Price
Outstanding at July 29, 2017
 
196,416

 
$
854

Granted
 
40,406

 
467

Exercised
 
(974
)
 
180

Cancelled
 
(40,406
)
 
467

Forfeited
 
(3,188
)
 
1,003

Expired
 
(1,551
)
 
363

Outstanding at October 28, 2017
 
190,703

 
$
859


Restricted Stock. In the first quarter of fiscal year 2017, Parent approved grants of 26,954 restricted shares of common stock of Parent to certain executive officers and management employees. Subject to continued employment, shares of restricted stock will vest over three or four years in equal increments on each anniversary of December 1, 2016. Each year beginning in calendar 2017, subject to certain limitations, each recipient will have the ability to require Parent to acquire his or her vested shares (the "put right") during the 14-day period following the release of the Company's earnings in respect of its first fiscal quarter (such period, the "put period") for a purchase price equal to the fair market value of Parent's common stock at the beginning of the put period. Except as described below with respect to our Chief Executive Officer, a recipient will forfeit all unvested shares of restricted stock and may not exercise the put right with respect to any vested shares following the termination of his or her employment for any reason. Following a voluntary departure without good reason or a termination for cause, we have the right to repurchase any vested shares of restricted stock at par value ($0.001 per share).

If our Chief Executive Officer's employment is terminated by Parent without cause, by her for good reason (as defined in her employment agreement) or by reason of the non-renewal of her employment agreement, (i) prior to a change in control of Parent, all unvested shares of restricted stock that would have vested in the 12-month period following the date of such termination of employment will accelerate and vest, and (ii) following a change in control but before an IPO, all unvested shares of restricted stock will accelerate and vest. Upon such termination, our Chief Executive Officer will have the ability to exercise the put right with respect to vested shares in the first put period following termination of employment.

20


At October 28, 2017, 20,313 shares of unvested restricted common stock were outstanding. The recorded liability with respect to such shares was $1.5 million at October 28, 2017 and $1.2 million at July 29, 2017.

Stock Compensation Expense. The following table summarizes our stock-based compensation expense:
 
 
Thirteen weeks ended
(in thousands)
 
October 28,
2017
 
October 29,
2016
 
 
 
 
 
Stock compensation expense:
 
 
 
 
Stock options
 
$
4,253

 
$
1,381

Restricted stock
 
306

 

Total
 
$
4,559

 
$
1,381


For a more detailed description of our stock-based awards, refer to Note 14 of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended July 29, 2017.


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.  These payments are based on the profitability of the credit card portfolio as determined under the Program Agreement and are impacted by a number of factors including credit losses incurred and our allocable share of the profits generated by the credit card portfolio, which in turn may be impacted by credit ratings as determined by various rating agencies.  In addition, we receive payments from Capital One for marketing and servicing activities we provide to Capital One. We recognize income from our credit card program when earned.

Additionally, beginning in July 2017, in accordance with the contractual provisions of the credit card program agreement, our allocable share of the profits generated by the credit card portfolio was reduced as a result of our current credit ratings.


13. Other Expenses
 
Other expenses consists of the following components:
 
 
Thirteen weeks ended
(in thousands)
 
October 28,
2017
 
October 29,
2016
 
 
 
 
 
Expenses related to store closures
 
$
1,318

 
$

Expenses related to Cyber-Attack, net of insurance recoveries
 
1,100

 

Expenses incurred in connection with strategic initiatives
 
422

 
6,553

MyTheresa acquisition costs (benefits)
 

 
(615
)
Other expenses
 

 
880

Total
 
$
2,840

 
$
6,818


During fiscal year 2017, we began a process to assess our Last Call footprint and closed four of our Last Call stores.  During the first quarter of fiscal year 2018, we announced that we will be closing ten additional Last Call stores in fiscal year 2018 in order to optimize our Last Call store portfolio. In the first quarter of fiscal year 2018, we incurred $1.3 million of expenses related to these store closures, which primarily consisted of severance costs.
We discovered in January 2014 that malicious software was clandestinely installed on our computer systems. In the first quarter of fiscal year 2018, we incurred legal expenses in connection with the Cyber-Attack.


21


We incurred professional fees and other costs aggregating $0.4 million in the first quarter of fiscal year 2018 and $6.6 million in the first quarter of fiscal year 2017 in connection with review of our resources and organizational processes ("Organizing for Growth"), implementation of our integrated merchandising and distribution system ("NMG One") and the evaluation of potential strategic alternatives. In connection with Organizing for Growth, we eliminated approximately 90 positions in the first quarter of fiscal year 2017 across our stores, divisions and facilities. We incurred $3.3 million of severance costs in the first quarter of fiscal year 2017.


14. Condensed Consolidating Financial Information (with respect to NMG's obligations under the Senior Secured Credit Facilities, Cash Pay Notes and PIK Toggle Notes)

All of NMG’s obligations under the Senior Secured Credit Facilities are guaranteed by Holdings and our current and future direct and indirect wholly owned subsidiaries, subject to exceptions as more fully described in Note 5.  All of NMG's obligations under the Cash Pay Notes and the PIK Toggle Notes are guaranteed by the same entities that guarantee the Senior Secured Credit Facilities, other than Holdings. Currently, the Company’s non-guarantor subsidiaries under the Senior Secured Credit Facilities, Cash Pay Notes and PIK Toggle Notes consist principally of (i) NMG Germany GmbH, through which we conduct the operations of MyTheresa, (ii) NMG International LLC, a holding company with respect to our foreign operations and (iii) Nancy Holdings LLC, which holds legal title to certain real property used by us in conducting our operations and described below under "— Results of Operations and Financial Condition of Unrestricted Subsidiaries". The non-guarantor subsidiary Nancy Holdings LLC had no assets or operations prior to March 10, 2017.
 
The following condensed consolidating financial information represents the financial information of the Company and its non-guarantor subsidiaries under the Senior Secured Credit Facilities, Cash Pay Notes and PIK Toggle Notes prepared on the equity basis of accounting.  The information is presented in accordance with the requirements of Rule 3-10 under the SEC’s Regulation S-X. The financial information may not necessarily be indicative of results of operations, cash flows or financial position had the non-guarantor subsidiaries operated as independent entities.
 
 
October 28, 2017
(in thousands)
 
Company
 
NMG
 
Guarantor Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
ASSETS
 
 

 
 
 
 

 
 

 
 

 
 

Current assets:
 
 

 
 
 
 

 
 

 
 

 
 

Cash and cash equivalents
 
$

 
$
35,812

 
$
868

 
$
4,784

 
$

 
$
41,464

Credit card receivables
 

 
40,836

 

 
3,509

 

 
44,345

Merchandise inventories
 

 
1,066,302

 
178,049

 
97,945

 

 
1,342,296

Other current assets
 

 
120,568

 
8,597

 
5,763

 
(587
)
 
134,341

Total current assets
 

 
1,263,518

 
187,514

 
112,001

 
(587
)
 
1,562,446

Property and equipment, net
 

 
1,308,927

 
147,231

 
103,408

 

 
1,559,566

Intangible assets, net
 

 
496,771

 
2,237,726

 
74,518

 

 
2,809,015

Goodwill
 

 
1,338,844

 
414,402

 
132,145

 

 
1,885,391

Other long-term assets
 

 
21,922

 
1,384

 

 

 
23,306

Investments in subsidiaries
 
451,559

 
3,243,542

 

 

 
(3,695,101
)
 

Total assets
 
$
451,559

 
$
7,673,524

 
$
2,988,257

 
$
422,072

 
$
(3,695,688
)
 
$
7,839,724

LIABILITIES AND MEMBER EQUITY
 
 

 
 

 
 
 
 

 
 

 
 

Current liabilities:
 
 

 
 

 
 
 
 

 
 

 
 

Accounts payable
 
$

 
$
313,887

 
$

 
$
14,043

 
$

 
$
327,930

Accrued liabilities
 

 
386,853

 
89,690

 
38,361

 
(587
)
 
514,317

Current portion of long-term debt
 

 
29,426

 

 

 

 
29,426

Total current liabilities
 

 
730,166

 
89,690

 
52,404

 
(587
)
 
871,673

Long-term liabilities:
 
 

 
 

 
 
 
 

 
 

 
 

Long-term debt, net of debt issuance costs
 

 
4,778,355

 

 
4,869

 

 
4,783,224

Deferred income taxes
 

 
1,132,282

 

 
14,900

 

 
1,147,182

Other long-term liabilities
 

 
581,162

 
5,397

 
(473
)
 

 
586,086

Total long-term liabilities
 

 
6,491,799

 
5,397

 
19,296

 

 
6,516,492

Total member equity
 
451,559

 
451,559

 
2,893,170

 
350,372

 
(3,695,101
)
 
451,559

Total liabilities and member equity
 
$
451,559

 
$
7,673,524

 
$
2,988,257

 
$
422,072

 
$
(3,695,688
)
 
$
7,839,724



22


 
 
July 29, 2017
(in thousands)
 
Company
 
NMG
 
Guarantor Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
ASSETS
 
 

 
 
 
 

 
 

 
 

 
 

Current assets:
 
 

 
 
 
 

 
 

 
 

 
 

Cash and cash equivalents
 
$

 
$
28,301

 
$
649

 
$
20,289

 
$

 
$
49,239

Credit card receivables
 

 
35,091

 

 
3,745

 

 
38,836

Merchandise inventories
 

 
915,910

 
151,193

 
86,554

 

 
1,153,657

Other current assets
 

 
135,174

 
9,956

 
1,896

 
(587
)
 
146,439

Total current assets
 

 
1,114,476

 
161,798

 
112,484

 
(587
)
 
1,388,171

Property and equipment, net
 

 
1,333,487

 
149,932

 
103,542

 

 
1,586,961

Intangible assets, net
 

 
509,757

 
2,249,290

 
72,369

 

 
2,831,416

Goodwill
 

 
1,338,844

 
414,402

 
127,648

 

 
1,880,894

Other long-term assets
 

 
14,384

 
1,690

 

 

 
16,074

Investments in subsidiaries
 
466,652

 
3,239,816

 

 

 
(3,706,468
)
 

Total assets
 
$
466,652

 
$
7,550,764

 
$
2,977,112

 
$
416,043

 
$
(3,707,055
)
 
$
7,703,516

LIABILITIES AND MEMBER EQUITY
 
 

 
 

 
 
 
 

 
 

 
 

Current liabilities:
 
 

 
 

 
 
 
 

 
 

 
 

Accounts payable
 
$

 
$
288,079

 
$

 
$
28,751

 
$

 
$
316,830

Accrued liabilities
 

 
350,773

 
74,832

 
31,919

 
(587
)
 
456,937

Current portion of long-term debt
 

 
29,426

 

 

 

 
29,426

Total current liabilities
 

 
668,278

 
74,832

 
60,670

 
(587
)
 
803,193

Long-term liabilities:
 
 

 
 

 
 
 
 

 
 

 
 

Long-term debt, net of debt issuance costs
 

 
4,675,540

 

 

 

 
4,675,540

Deferred income taxes
 

 
1,144,022

 

 
12,811

 

 
1,156,833

Other long-term liabilities
 

 
596,272

 
5,379

 
(353
)
 

 
601,298

Total long-term liabilities
 

 
6,415,834

 
5,379

 
12,458

 

 
6,433,671

Total member equity
 
466,652

 
466,652

 
2,896,901

 
342,915

 
(3,706,468
)
 
466,652

Total liabilities and member equity
 
$
466,652

 
$
7,550,764

 
$
2,977,112

 
$
416,043

 
$
(3,707,055
)
 
$
7,703,516



23


 
 
October 29, 2016
(in thousands)
 
Company
 
NMG
 
Guarantor Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
ASSETS
 
 

 
 
 
 

 
 

 
 

 
 

Current assets:
 
 

 
 
 
 

 
 

 
 

 
 

Cash and cash equivalents
 
$

 
$
32,930

 
$
590

 
$
8,557

 
$

 
$
42,077

Credit card receivables
 

 
41,986

 

 
713

 

 
42,699

Merchandise inventories
 

 
1,075,930

 
179,537

 
69,593

 

 
1,325,060

Other current assets
 

 
131,074

 
8,967

 
3,013

 
(1,432
)
 
141,622

Total current assets
 

 
1,281,920

 
189,094

 
81,876

 
(1,432
)
 
1,551,458

Property and equipment, net
 

 
1,455,501

 
148,965

 
3,033

 

 
1,607,499

Intangible assets, net
 

 
551,654

 
2,593,726

 
73,202

 

 
3,218,582

Goodwill
 

 
1,412,146

 
537,263

 
125,713

 

 
2,075,122

Other long-term assets
 

 
10,580

 
3,135

 

 

 
13,715

Intercompany notes receivable
 

 

 
199,460

 

 
(199,460
)
 

Investments in subsidiaries
 
922,978

 
3,599,514

 

 

 
(4,522,492
)
 

Total assets
 
$
922,978

 
$
8,311,315

 
$
3,671,643

 
$
283,824

 
$
(4,723,384
)
 
$
8,466,376

LIABILITIES AND MEMBER EQUITY
 
 

 
 

 
 

 
 

 
 

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