10-Q 1 q3fy162016043010q.htm 10-Q Document

 
 
 
 
 
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 April 30, 2016
 
OR
 
o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from              to            
 
Commission file no. 333-133184-12
 
Neiman Marcus Group LTD LLC
(Exact name of registrant as specified in its charter) 
Delaware
20-3509435
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
1618 Main Street
Dallas, Texas
75201
(Address of principal executive offices)
(Zip code)
Registrant’s telephone number, including area code: (214) 743-7600
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes o  No ý
(Note: The registrant is a voluntary filer and not subject to the filing requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934. Although not subject to these filing requirements, the registrant has filed all reports that would have been required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months had the registrant been subject to such requirements.)
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes ý  No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
Accelerated filer o
 
 
Non-accelerated filer x
Smaller reporting company o
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes o  No ý

 
 
 
 
 


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



NEIMAN MARCUS GROUP LTD LLC
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
 
(in thousands, except units)
 
April 30,
2016
 
August 1,
2015
 
May 2,
2015
 
 
 
 
 
 
 
ASSETS
 
 

 
 

 
 

Current assets:
 
 

 
 

 
 

Cash and cash equivalents
 
$
76,282

 
$
72,974

 
$
82,211

Merchandise inventories
 
1,200,913

 
1,154,844

 
1,173,262

Deferred income taxes
 
41,963

 
30,714

 
33,883

Other current assets
 
162,167

 
126,169

 
108,507

Total current assets
 
1,481,325

 
1,384,701

 
1,397,863

 
 
 
 
 
 
 
Property and equipment, net
 
1,547,739

 
1,477,886

 
1,439,657

Intangible assets, net
 
3,515,585

 
3,598,562

 
3,625,450

Goodwill
 
2,276,041

 
2,272,483

 
2,267,897

Other long-term assets
 
124,773

 
142,130

 
140,578

Total assets
 
$
8,945,463

 
$
8,875,762

 
$
8,871,445

 
 
 
 
 
 
 
LIABILITIES AND MEMBER EQUITY
 
 

 
 

 
 

Current liabilities:
 
 

 
 

 
 

Accounts payable
 
$
264,727

 
$
342,999

 
$
280,285

Accrued liabilities
 
486,681

 
465,402

 
457,504

Current portion of long-term debt
 
29,426

 
29,426

 
29,426

Total current liabilities
 
780,834

 
837,827

 
767,215

 
 
 
 
 
 
 
Long-term liabilities:
 
 

 
 

 
 

Long-term debt
 
4,794,399

 
4,681,309

 
4,708,612

Deferred income taxes
 
1,500,244

 
1,471,091

 
1,500,914

Other long-term liabilities
 
452,414

 
471,791

 
439,994

Total long-term liabilities
 
6,747,057

 
6,624,191

 
6,649,520

 
 
 
 
 
 
 
Membership unit (1 unit issued and outstanding at April 30, 2016, August 1, 2015 and May 2, 2015)
 
—

 
—

 
—

Member capital
 
1,584,216

 
1,584,106

 
1,584,106

Accumulated other comprehensive loss
 
(48,646
)
 
(51,228
)
 
(43,144
)
Accumulated deficit
 
(117,998
)
 
(119,134
)
 
(86,252
)
Total member equity
 
1,417,572

 
1,413,744

 
1,454,710

Total liabilities and member equity
 
$
8,945,463

 
$
8,875,762

 
$
8,871,445

 
See Notes to Condensed Consolidated Financial Statements.


1

NEIMAN MARCUS GROUP LTD LLC
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
 
 
 
Thirteen weeks ended
(in thousands)
 
April 30,
2016
 
May 2,
2015
 
 
 
 
 
Revenues
 
$
1,169,292

 
$
1,220,100

Cost of goods sold including buying and occupancy costs (excluding depreciation)
 
743,471

 
755,034

Selling, general and administrative expenses (excluding depreciation)
 
274,777

 
285,689

Income from credit card program
 
(15,010
)
 
(11,899
)
Depreciation expense
 
59,616

 
48,070

Amortization of intangible assets
 
13,978

 
16,035

Amortization of favorable lease commitments
 
13,421

 
13,640

Other expenses (income)
 
(634
)
 
5,571

 
 
 
 
 
Operating earnings
 
79,673

 
107,960

 
 
 
 
 
Interest expense, net
 
72,675

 
72,844

 
 
 
 
 
Earnings before income taxes
 
6,998

 
35,116

 
 
 
 
 
Income tax expense
 
3,208

 
15,296

 
 
 
 
 
Net earnings
 
$
3,790

 
$
19,820


See Notes to Condensed Consolidated Financial Statements.




2

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

 
 
Thirty-nine weeks ended
(in thousands)
 
April 30,
2016
 
May 2,
2015
 
 
 
 
 
Revenues
 
$
3,821,149

 
$
3,928,416

Cost of goods sold including buying and occupancy costs (excluding depreciation)
 
2,505,837

 
2,502,553

Selling, general and administrative expenses (excluding depreciation)
 
862,773

 
894,666

Income from credit card program
 
(44,634
)
 
(40,752
)
Depreciation expense
 
169,157

 
136,590

Amortization of intangible assets
 
43,426

 
66,764

Amortization of favorable lease commitments
 
40,570

 
40,675

Other expenses
 
24,512

 
28,080

 
 
 
 
 
Operating earnings
 
219,508

 
299,840

 
 
 
 
 
Interest expense, net
 
215,855

 
217,919

 
 
 
 
 
Earnings before income taxes
 
3,653

 
81,921

 
 
 
 
 
Income tax expense
 
2,517

 
34,090

 
 
 
 
 
Net earnings
 
$
1,136

 
$
47,831


See Notes to Condensed Consolidated Financial Statements.


3

NEIMAN MARCUS GROUP LTD LLC
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(UNAUDITED)
 
 
 
Thirteen weeks ended
(in thousands)
 
April 30,
2016
 
May 2,
2015
 
 
 
 
 
Net earnings
 
$
3,790

 
$
19,820

 
 
 
 
 
Other comprehensive earnings (loss):
 
 

 
 

Foreign currency translation adjustments, net of tax expense (income) of $2,793 and ($4,859)
 
5,460

 
(15,707
)
Change in unrealized loss on financial instruments, net of tax expense of $324 and $597
 
503

 
925

Change in unrealized loss on unfunded benefit obligations, net of tax income of ($57) and ($35)
 
(89
)
 
(57
)
Total other comprehensive earnings (loss)
 
5,874

 
(14,839
)
 
 
 
 
 
Total comprehensive earnings
 
$
9,664

 
$
4,981

 
See Notes to Condensed Consolidated Financial Statements.


4

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

 
 
Thirty-nine weeks ended
(in thousands)
 
April 30,
2016
 
May 2,
2015
 
 
 
 
 
Net earnings
 
$
1,136

 
$
47,831

 
 
 
 
 
Other comprehensive earnings (loss):
 
 

 
 
Foreign currency translation adjustments, net of tax expense (income) of $1,651 and ($6,554)
 
2,161

 
(21,684
)
Change in unrealized loss on financial instruments, net of tax expense (income) of $780 and ($1,291)
 
1,210

 
(2,007
)
Change in unrealized loss on unfunded benefit obligations, net of tax income of ($509) and ($1,303)
 
(789
)
 
(2,024
)
Total other comprehensive earnings (loss)
 
2,582

 
(25,715
)
 
 
 
 
 
Total comprehensive earnings
 
$
3,718

 
$
22,116

 
See Notes to Condensed Consolidated Financial Statements.


5

NEIMAN MARCUS GROUP LTD LLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
 
Thirty-nine weeks ended
(in thousands)
 
April 30,
2016
 
May 2,
2015
 
 
 
 
 
CASH FLOWS - OPERATING ACTIVITIES
 
 

 
 

Net earnings
 
$
1,136

 
$
47,831

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 

 
 

Depreciation and amortization expense
 
271,582

 
262,446

Deferred income taxes
 
15,785

 
(49,207
)
Other
 
6,223

 
18,576

 
 
294,726

 
279,646

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

 
 

Merchandise inventories
 
(44,670
)
 
(72,215
)
Other current assets
 
(35,888
)
 
141

Other assets
 
2,095

 
378

Accounts payable and accrued liabilities
 
(95,992
)
 
(115,235
)
Deferred real estate credits
 
30,180

 
30,098

Net cash provided by operating activities
 
150,451

 
122,813

 
 
 
 
 
CASH FLOWS - INVESTING ACTIVITIES
 
 

 
 

Capital expenditures
 
(231,993
)
 
(183,016
)
Acquisition of MyTheresa
 
(896
)
 
(181,727
)
Net cash used for investing activities
 
(232,889
)
 
(364,743
)
 
 
 
 
 
CASH FLOWS - FINANCING ACTIVITIES
 
 

 
 

Borrowings under senior secured asset-based revolving credit facility
 
495,000

 
480,000

Repayment of borrowings under senior secured asset-based revolving credit facility
 
(360,000
)
 
(330,000
)
Repayment of borrowings under senior secured term loan facility
 
(22,069
)
 
(22,070
)
Payment of contingent earn-out obligation
 
(27,185
)
 
—

Debt issuance costs paid
 
—

 
(265
)
Net cash provided by financing activities
 
85,746

 
127,665

 
 
 
 
 
CASH AND CASH EQUIVALENTS
 
 

 
 

Increase (decrease) during the period
 
3,308

 
(114,265
)
Beginning balance
 
72,974

 
196,476

Ending balance
 
$
76,282

 
$
82,211

 
 
 
 
 
Supplemental Schedule of Cash Flow Information
 
 

 
 

Cash paid during the period for:
 
 

 
 

Interest
 
$
231,950

 
$
230,751

Income taxes
 
$
16,106

 
$
58,254

Non-cash activities:
 
 

 
 

Contingent earn-out obligation incurred in connection with acquisition of MyTheresa
 
$
—

 
$
50,043

See Notes to Condensed Consolidated Financial Statements.

6

NEIMAN MARCUS GROUP LTD LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
1.              Basis of Presentation
 
Neiman Marcus Group LTD LLC (the "Company") is a luxury 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.

On October 25, 2013, the Company merged with and into Mariposa Merger Sub LLC ("Mariposa") pursuant to an Agreement and Plan of Merger, dated September 9, 2013, by and among Neiman Marcus Group, Inc. (f/k/a NM Mariposa Holdings, Inc.) ("Parent"), Mariposa and the Company, with the Company surviving the merger (the "Acquisition").  As a result of the Acquisition and the Conversion (as defined below), the Company is now a direct subsidiary of Mariposa Intermediate Holdings LLC ("Holdings"), which in turn is a direct subsidiary of Parent. Parent is owned by entities affiliated with Ares Management, L.P. and Canada Pension Plan Investment Board (together, the "Sponsors") and certain co-investors.  Previously, the Company was a subsidiary of Newton Holding, LLC, which was controlled by investment funds affiliated with TPG Global, LLC (collectively with its affiliates, "TPG") and Warburg Pincus LLC (together with TPG, the "Former Sponsors").  On October 28, 2013, the Company and NMG (as defined below) each converted from a Delaware corporation to a Delaware limited liability company (the "Conversion").
 
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 third quarter of fiscal year 2016 relate to the thirteen weeks ended April 30, 2016, (ii) the third quarter of fiscal year 2015 relate to the thirteen weeks ended May 2, 2015, (iii) year-to-date fiscal 2016 relate to the thirty-nine weeks ended April 30, 2016 and (iv) year-to-date fiscal 2015 relate to the thirty-nine weeks ended May 2, 2015.
 
We have prepared the accompanying Condensed Consolidated Financial Statements in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial information and Rule 10-01 of Regulation S-X of the Securities Act of 1933, as amended.  Accordingly, these financial statements do not include all of the information and footnotes required by GAAP for complete financial statements.  Therefore, these financial statements should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended August 1, 2015.  In our opinion, the accompanying Condensed Consolidated Financial Statements contain all adjustments, consisting of normal recurring adjustments, necessary to present fairly our financial position, results of operations and cash flows for the applicable interim periods.
 
The luxury retail industry is seasonal in nature, with higher sales typically generated in the fall and holiday selling seasons.  Due to seasonal and other factors, the results of operations for the third quarter of fiscal year 2016 are not necessarily comparable to, or indicative of, results of any other interim period or for the fiscal year as a whole.
 
A detailed description of our critical accounting policies is included in our Annual Report on Form 10-K for the fiscal year ended August 1, 2015.

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

7

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

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

•
allocation of the purchase price paid to effect the acquisitions to state the acquired assets and liabilities at fair value as of the acquisition dates; 
•
recognition of revenues;
•
valuation of merchandise inventories, including determination of original retail values, recognition of markdowns and vendor allowances, estimation of inventory shrinkage and determination of cost of goods sold;
•
determination of impairment of 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.
 
Recent Accounting Pronouncements. In May 2014, the Financial Accounting Standards Board (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 the most recent revenue recognition guidance. This new guidance is effective for us no earlier than the first quarter of fiscal year 2019 using one of two retrospective application methods.

In April 2015, the FASB issued guidance to simplify the balance sheet presentation of debt issuance costs. The standard requires that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying value of the associated debt, consistent with the presentation of debt discounts or premiums. The recognition and measurement guidance for debt issuance costs are not affected by the new guidance. In addition, the FASB issued guidance in August 2015 to clarify the treatment of debt issuance costs related to line of credit arrangements. Companies can continue to present debt issuance costs for line of credit arrangements as an asset and subsequently amortize the deferred issuance cost ratably over the term of the arrangement. This new guidance is effective for us as of the first quarter of fiscal year 2017.

In April 2015, the FASB issued guidance related to the accounting for cloud computing arrangements. Under this guidance, if a cloud computing arrangement includes a software license, the software license element should be accounted for in a manner consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the arrangement should be accounted for as a service contract. This new guidance is effective for us as of the first quarter of fiscal year 2017.

In November 2015, the FASB issued guidance to simplify the balance sheet presentation of deferred income taxes. The standard requires that deferred tax liabilities and assets be classified as non-current in a balance sheet. This new guidance is effective for us as of the first quarter of fiscal year 2018 using either a prospective or retrospective application method.

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 to not 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 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 March 2016, 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

8

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. This new guidance is effective for us as of the first quarter of fiscal year 2018.

With respect to each of the recent accounting pronouncements described above, we are currently evaluating which application methods to adopt and the impact of adopting these new accounting standards on our Condensed Consolidated Financial Statements. In addition, we do not expect that any other recently issued accounting pronouncements will have a material impact on our Condensed Consolidated Financial Statements.


2.              MyTheresa Acquisition

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 purchase price paid to acquire MyTheresa, net of cash acquired, was $181.7 million, which was financed through a combination of cash and debt. In addition, the MyTheresa purchase agreement contains contingent earn-out payments to the sellers aggregating up to €55.0 million based on operating performance for calendar years 2015 and 2016. In April 2016, we paid $29.8 million, or €26.5 million, to the sellers as a result of MyTheresa's operating performance for calendar year 2015. The estimated fair value of the remaining earn-out obligation related to operating performance for calendar year 2016 was $27.4 million, or €24.1 million, at April 30, 2016. MyTheresa results of operations are included in our condensed consolidated results of operations beginning in the second quarter of fiscal year 2015.


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

•
Level 1 — Unadjusted quoted prices for identical instruments traded in active markets.
•
Level 2 — Observable market-based inputs or unobservable inputs corroborated by market data.
•
Level 3 — Unobservable inputs reflecting management’s estimates and assumptions.
The following table shows the Company’s financial assets 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
 
April 30,
2016
 
August 1,
2015
 
May 2,
2015
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 

 
 

 
 

Interest rate caps (included in long-term assets)
 
Level 2
 
$
—

 
$
21

 
$
106

 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Interest rate swaps (included in accrued liabilities)
 
Level 2
 
$
906

 
$
—

 
$
—

Contingent earn-out obligation (included in accrued liabilities)
 
Level 3
 
27,445

 
—

 
—

Contingent earn-out obligation (included in other long-term liabilities)
 
Level 3
 
—

 
51,251

 
45,661

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

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

9

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:
 
 
 
 
April 30, 2016
 
August 1, 2015
 
May 2, 2015
(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
 
$
265,000

 
$
265,000

 
$
130,000

 
$
130,000

 
$
150,000

 
$
150,000

Senior Secured Term Loan Facility
 
Level 2
 
2,876,416

 
2,748,789

 
2,898,485

 
2,887,616

 
2,905,842

 
2,920,371

Cash Pay Notes
 
Level 2
 
960,000

 
835,200

 
960,000

 
1,021,200

 
960,000

 
1,034,400

PIK Toggle Notes
 
Level 2
 
600,000

 
498,000

 
600,000

 
639,120

 
600,000

 
648,120

2028 Debentures
 
Level 2
 
122,409

 
113,125

 
122,250

 
124,531

 
122,196

 
125,320


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 $600.0 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 made estimates of the fair value of our long-lived and intangible assets based upon assumptions related to the future cash flows, discount rates and asset lives utilizing currently available information, and in some cases, valuation results from independent valuation specialists (Level 3 determination of fair value).  We also measure certain non-financial assets at fair value on a non-recurring basis, primarily long-lived assets, intangible assets and goodwill, in connection with our periodic evaluations of such assets for potential impairment.


4.     Intangible Assets, Net and Goodwill
 
(in thousands)
 
April 30,
2016
 
August 1,
2015
 
May 2,
2015
 
 
 
 
 
 
 
Favorable lease commitments, net
 
$
999,343

 
$
1,040,440

 
$
1,054,092

Other definite-lived intangible assets, net
 
477,996

 
521,275

 
536,960

Tradenames
 
2,038,246

 
2,036,847

 
2,034,398

Intangible assets, net
 
$
3,515,585

 
$
3,598,562

 
$
3,625,450

 
 
 
 
 
 
 
Goodwill
 
$
2,276,041

 
$
2,272,483

 
$
2,267,897


Intangible Assets Subject to Amortization. Our definite-lived intangible assets, which consist primarily 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).  Favorable lease commitments are amortized straight-line over the remaining lives of the leases, ranging from four to 55 years (weighted average life of 30 years from the respective acquisition dates).


10

Total amortization of all intangible assets recorded in connection with acquisitions for the current and next five fiscal years is currently estimated as follows (in thousands):
May 1, 2016 through July 30, 2016
$
27,728

2017
106,107

2018
100,128

2019
97,068

2020
90,419

2021
84,502


At April 30, 2016, accumulated amortization was $234.5 million for other definite-lived intangible assets and $135.4 million for favorable lease commitments.

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


5.              Long-term Debt
 
The significant components of our long-term debt are as follows:
(in thousands)
 
Interest
Rate
 
April 30,
2016
 
August 1,
2015
 
May 2,
2015
 
 
 
 
 
 
 
 
 
Asset-Based Revolving Credit Facility
 
variable
 
$
265,000

 
$
130,000

 
$
150,000

Senior Secured Term Loan Facility
 
variable
 
2,876,416

 
2,898,485

 
2,905,842

Cash Pay Notes
 
8.00%
 
960,000

 
960,000

 
960,000

PIK Toggle Notes
 
8.75%/9.50%
 
600,000

 
600,000

 
600,000

2028 Debentures
 
7.125%
 
122,409

 
122,250

 
122,196

Total debt
 
 
 
4,823,825

 
4,710,735

 
4,738,038

Less: current portion of Senior Secured Term Loan Facility
 
 
 
(29,426
)
 
(29,426
)
 
(29,426
)
Long-term debt
 
 
 
$
4,794,399

 
$
4,681,309

 
$
4,708,612

Asset-Based Revolving Credit Facility.  On October 25, 2013, the Company entered into a credit agreement and related security and other agreements for the Asset-Based Revolving Credit Facility. At April 30, 2016, the Asset-Based Revolving Credit Facility provided for a maximum committed borrowing capacity of $900.0 million. The Asset-Based Revolving Credit Facility matures on October 25, 2018.  On April 30, 2016, we had $265.0 million of borrowings outstanding under this facility, no outstanding letters of credit and $545.0 million of unused borrowing availability.
 
Availability under the Asset-Based Revolving Credit Facility is subject to a borrowing base.  The Asset-Based Revolving Credit Facility includes borrowing capacity available for letters of credit (up to $150.0 million, with any such issuance of letters of credit reducing the amount available under the Asset-Based Revolving Credit Facility on a dollar-for-dollar basis) and for borrowings on same-day notice.  The borrowing base is equal to at any time the sum of (a) 90% of the net orderly liquidation value of eligible inventory, net of certain reserves, plus (b) 90% of the amounts owed by credit card processors in respect of eligible credit card accounts constituting proceeds from the sale or disposition of inventory, less certain reserves, plus (c) 100% of segregated cash held in a restricted deposit account.  To the extent that excess availability is not equal to or greater than the greater of (a) 10% of the lesser of (1) the aggregate revolving commitments and (2) the borrowing base and (b) $50.0 million, we will be required to maintain a fixed charge coverage ratio.
 
The Asset-Based Revolving Credit Facility permits us to increase commitments under the Asset-Based Revolving Credit Facility or add one or more incremental term loans to the Asset-Based Revolving Credit Facility by an amount not to exceed $200.0 million. However, the lenders are under no obligation to provide any such additional commitments or loans, and any increase in commitments or incremental term loans will be subject to customary conditions precedent.  If we were to request any such additional commitments and the existing lenders or new lenders were to agree to provide such commitments, the size of the Asset-Based Revolving Credit Facility could be increased to up to $1,100.0 million, but our ability to borrow would still be limited by the amount of the borrowing base.  The cash proceeds of any incremental term loans may be used for working capital and general corporate purposes.


11

At April 30, 2016, borrowings under the Asset-Based Revolving Credit Facility bore interest at a rate per annum equal to, at our option, either (a) a base rate determined by reference to the highest of (1) the prime rate of Deutsche Bank AG New York Branch (the administrative agent), (2) the federal funds effective rate plus ½ of 1.00% and (3) the adjusted one-month LIBOR plus 1.00% or (b) LIBOR, subject to certain adjustments, in each case plus an applicable margin (1.25% at April 30, 2016).  The applicable margin is up to 0.75% with respect to base rate borrowings and up to 1.75% with respect to LIBOR borrowings.  The applicable margin is subject to adjustment based on the average historical excess availability under the Asset-Based Revolving Credit Facility. The weighted average interest rate on the outstanding borrowings pursuant to the Asset-Based Revolving Credit Facility was 1.69% at April 30, 2016.  In addition, we are required to pay a commitment fee in respect of unused commitments at a rate of 0.25% per annum.  We must also pay customary letter of credit fees and agency fees.

If at any time the aggregate amount of outstanding revolving loans, unreimbursed letter of credit drawings and undrawn letters of credit under the Asset-Based Revolving Credit Facility exceeds the lesser of (a) the aggregate revolving commitments and (b) the borrowing base, we will be required to repay outstanding loans or cash collateralize letters of credit in an aggregate amount equal to such excess, with no reduction of the commitment amount.  If the excess availability under the Asset-Based Revolving Credit Facility is less than the greater of (a) 10% of the lesser of (1) the aggregate revolving commitments and (2) the borrowing base and (b) $50.0 million for a period of five or more consecutive business days, funds held in a collection account maintained with the agent would be applied to repay the loans and other obligations and cash collateralize letters of credit.  We would then be required to make daily deposits in the collection account maintained with the agent under the Asset-Based Revolving Credit Facility.
We may voluntarily reduce the unutilized portion of the commitment amount and repay outstanding loans at any time without premium or penalty other than customary breakage costs with respect to LIBOR loans.  There is no scheduled amortization under the Asset-Based Revolving Credit Facility; the principal amount of the revolving loans outstanding thereunder will be due and payable in full on October 25, 2018, unless extended.
 
The Asset-Based Revolving Credit Facility is guaranteed by Holdings and each of our current and future direct and indirect wholly owned subsidiaries (subsidiary guarantors) other than (a) unrestricted subsidiaries, (b) certain immaterial subsidiaries, (c) foreign subsidiaries and any domestic subsidiary of a foreign subsidiary, (d) certain holding companies of foreign subsidiaries, (e) captive insurance subsidiaries, not for profit subsidiaries, or a subsidiary which is a special purpose entity for securitization transactions or like special purposes and (f) any subsidiary that is prohibited by applicable law or contractual obligation from acting as a guarantor or which would require governmental approval to provide a guarantee. At April 30, 2016, the assets of non-guarantor subsidiaries, primarily NMG Germany GmbH (through which we conduct the operations of MyTheresa), were $282.3 million, or approximately 3% of consolidated total assets. All obligations under the Asset-Based Revolving Credit Facility, and the guarantees of those obligations, are secured, subject to certain significant exceptions, by substantially all of the assets of Holdings, the Company and the subsidiary guarantors.
The Asset-Based Revolving Credit Facility contains covenants limiting, among other things, dividends and other restricted payments, investments, loans, advances and acquisitions, and prepayments or redemptions of other indebtedness.  These covenants permit such restricted actions in an unlimited amount, subject to the satisfaction of certain payment conditions, principally that we must have (x) pro forma excess availability under the Asset-Based Revolving Credit Facility for each day of the 30-day period prior to such actions, which exceeds the greater of $90.0 million or 15% of the lesser of (a) the revolving commitments under the Asset-Based Revolving Credit Facility and (b) the borrowing base and (y) a pro forma fixed charge coverage ratio of at least 1.0 to 1.0, unless pro forma excess availability for each day of the 30-day period prior to such actions under the Asset-Based Revolving Credit Facility would exceed the greater of (1) $200.0 million and (2) 25% of the lesser of (i) the aggregate revolving commitments under the Asset-Based Revolving Credit Facility and (ii) the borrowing base.  The Asset-Based Revolving Credit Facility also contains customary affirmative covenants and events of default, including a cross-default provision in respect of any other indebtedness that has an aggregate principal amount exceeding $50.0 million.
For a more detailed description of the Asset-Based Revolving Credit Facility, refer to Note 8 of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended August 1, 2015.
 
Senior Secured Term Loan Facility.  On October 25, 2013, the Company entered into a credit agreement and related security and other agreements for the $2,950.0 million Senior Secured Term Loan Facility. At April 30, 2016 (after giving effect to the Refinancing Amendment described below), the outstanding balance under the Senior Secured Term Loan Facility was $2,876.4 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

12

payment to the term loans or unsecured and pari passu in right of payment with the term loans, a total net leverage ratio equal to or less than the total net leverage ratio as of October 25, 2013.

On March 13, 2014, we entered into a refinancing amendment with respect to the Senior Secured Term Loan Facility (the Refinancing Amendment). The Refinancing Amendment provided for an immediate reduction in the interest rate margin applicable to the loans outstanding under the Senior Secured Term Loan Facility from (a) 4.00% to 3.25% for LIBOR borrowings and (b) 3.00% to 2.25% for base rate borrowings. In addition, the interest rate margin in the event of a step down based on our senior secured first lien net leverage, as defined in the credit agreement governing the Senior Secured Term Loan Facility, was reduced from (1) 3.75% to 3.00% for LIBOR borrowings and (2) 2.75% to 2.00% for base rate borrowings. Substantially all other terms are consistent with the credit agreement governing the Senior Secured Term Loan Facility as of October 25, 2013, including the amortization schedule and maturity dates.
 
At April 30, 2016, 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 April 30, 2016.  The interest rate on the outstanding borrowings pursuant to the Senior Secured Term Loan Facility was 4.25% at April 30, 2016.
 
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 2015.
 
We may repay all or any portion of the Senior Secured Term Loan Facility at any time, subject to redeployment costs in the case of prepayment of LIBOR borrowings other than the last day of the relevant interest period. The Senior Secured Term Loan Facility amortizes in equal quarterly installments in an amount equal to 1.00% per annum of the principal amount outstanding as of the Refinancing Amendment, less certain voluntary or mandatory prepayments, with the remaining balance due at final maturity.
 
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 April 30, 2016, the assets of non-guarantor subsidiaries, primarily NMG Germany GmbH (through which we conduct the operations of MyTheresa), were $282.3 million, or approximately 3% of consolidated total assets. All obligations under the Senior Secured Term Loan Facility, and the guarantees of those obligations, are secured, subject to certain exceptions, by substantially all of the assets of Holdings, the Company and the subsidiary guarantors.
The credit agreement governing the Senior Secured Term Loan Facility contains a number of negative covenants and covenants related to the security arrangements for the Senior Secured Term Loan Facility.  The credit agreement also contains customary affirmative covenants and events of default, including a cross-default provision in respect of any other indebtedness that has an aggregate principal amount exceeding $50.0 million.
For a more detailed description of the Senior Secured Term Loan Facility, refer to Note 8 of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended August 1, 2015.
 
Cash Pay Notes.  In connection with the Acquisition, 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.  The Cash Pay Notes mature on October 15, 2021.

13

We may redeem the Cash Pay Notes, in whole or in part, at any time and from time to time prior to October 15, 2016, at a price equal to 100% of the principal amount of the Cash Pay Notes redeemed plus accrued and unpaid interest up to the redemption date plus the applicable premium. In addition, we may redeem up to 40% in the aggregate principal amount of the Cash Pay Notes with the net proceeds of certain equity offerings at any time and from time to time before October 15, 2016 at a redemption price equal to 108.00% of the face amount thereof, plus accrued and unpaid interest up to the date of redemption, so long as at least 50% of the original aggregate principal amount of the Cash Pay Notes remain outstanding after such redemption and such redemption occurs within 120 days of the equity offering. On and after October 15, 2016, we may redeem the Cash Pay Notes, in whole or in part, at the redemption prices set forth in the indenture governing the Cash Pay Notes.

For a more detailed description of the Cash Pay Notes, refer to Note 8 of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended August 1, 2015.

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

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

For a more detailed description of the PIK Toggle Notes, refer to Note 8 of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended August 1, 2015.

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 April 30, 2016, our non-guarantor subsidiaries consisted principally of Bergdorf Goodman, Inc., through which we conduct the operations of our Bergdorf Goodman stores, NM Nevada Trust, which holds legal title to certain real property and intangible assets used by us in conducting our operations, and NMG Germany GmbH, through which we conduct the operations of MyTheresa.  The 2028 Debentures include certain restrictive covenants and a cross-acceleration provision in respect of any other indebtedness that has an aggregate principal amount exceeding $15.0 million.  The 2028 Debentures mature on June 1, 2028.
 
For a more detailed description of the 2028 Debentures, refer to Note 8 of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended August 1, 2015.

Maturities of Long-term Debt.  At April 30, 2016, annual maturities of long-term debt during the current and next five fiscal years and thereafter are as follows (in millions):
May 1, 2016 through July 30, 2016
$
7.4

2017
29.4

2018
29.4

2019
294.4

2020
29.4

2021
2,751.4

Thereafter
1,682.4


14

The previous table does not reflect future excess cash flow prepayments, if any, that may be required under the Senior Secured Term Loan Facility.
 
Interest Expense.  The significant components of interest expense are as follows:
 
 
Thirteen weeks ended
 
Thirty-nine weeks ended
(in thousands)
 
April 30,
2016
 
May 2,
2015
 
April 30,
2016
 
May 2,
2015
 
 
 
 
 
 
 
 
 
Asset-Based Revolving Credit Facility
 
$
798

 
$
402

 
$
2,407

 
$
1,117

Senior Secured Term Loan Facility
 
31,011

 
31,326

 
93,269

 
94,310

Cash Pay Notes
 
19,200

 
19,200

 
57,600

 
57,600

PIK Toggle Notes
 
13,125

 
13,125

 
39,375

 
39,375

2028 Debentures
 
2,227

 
2,227

 
6,680

 
6,680

Amortization of debt issue costs
 
6,143

 
6,143

 
18,429

 
18,417

Other, net
 
1,516

 
923

 
2,739

 
2,100

Capitalized interest
 
(1,345
)
 
(502
)
 
(4,644
)
 
(1,680
)
Interest expense, net
 
$
72,675

 
$
72,844

 
$
215,855

 
$
217,919



6.              Derivative Financial Instruments
 
Interest rate caps. At April 30, 2016, we had outstanding floating rate debt obligations of $3,141.4 million. In April 2014, we entered into interest rate cap agreements (at a cost of $2.0 million) for an aggregate notional amount of $1,400.0 million to hedge the variability of our cash flows related to a portion of our floating rate indebtedness. The interest rate cap agreements effectively cap 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. In the event LIBOR is less than 3.00%, we will pay interest at the lower LIBOR rate. In the event LIBOR is higher than 3.00%, we will pay interest at the capped rate of 3.00%. The fair value of our interest rate caps was zero on April 30, 2016.
Gains and losses realized due to the expiration of applicable portions of the interest rate caps are reclassified to interest expense at the time our quarterly interest payments are made. Losses of $0.2 million were realized in the third quarter of fiscal year 2016 and in year-to-date fiscal 2016. No gains or losses were realized in the third quarter of fiscal year 2015 or in year-to-date fiscal 2015.

Interest rate swaps. In April 2016, we entered into floating to fixed interest rate swap agreements for an aggregate notional amount of $700.0 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 beginning in December 2016 and through the expiration of the agreements in October 2020. As a result of the swap agreements, our effective interest rate as to the $700.0 million in floating rate indebtedness will be fixed at 4.912% per month from December 2016 through October 2020. On April 30, 2016, the fair value of our interest rate swap agreements was a loss of $0.9 million, which amount is included in accrued liabilities. The interest rate swap agreements expire in October 2020.

As of the effective date, 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. As of the effective date, 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.


15

7.              Income Taxes
 
Our effective income tax rates are as follows:
 
 
Thirteen weeks ended
 
Thirty-nine weeks ended
 
 
April 30,
2016
 
May 2,
2015
 
April 30,
2016
 
May 2,
2015
 
 

 

 

 

Effective income tax rate
 
45.8
%
 
43.6
%
 
68.9
%
 
41.6
%

Our effective income tax rate exceeded the federal statutory tax rate of 35.0% for the third quarter of fiscal year 2016 and the third quarter of fiscal year 2015 due primarily to state income taxes and the non-deductible portion of transaction and other costs incurred in connection with the MyTheresa acquisition.

Our effective income tax rate exceeded the federal statutory tax rate of 35.0% for year-to-date fiscal 2016 and year-to-date fiscal 2015 due primarily to state income taxes and the non-deductible portion of transaction and other costs incurred in connection with the MyTheresa acquisition. In addition, with respect to year-to-date fiscal 2016, the effective income tax rate was impacted by the application of our estimated effective tax rate to our year-to-date quarterly periods (consisting of both loss and income generating periods) and reductions in our estimated tax reserves due to the expiration of statutes of limitations.
 
At April 30, 2016, the gross amount of unrecognized tax benefits was $0.9 million ($0.6 million of which would impact our effective tax rate, if recognized).  We classify interest and penalties as a component of income tax expense and our liability for accrued interest and penalties was $4.1 million at April 30, 2016, $4.8 million at August 1, 2015 and $4.6 million at May 2, 2015.
 
We file income tax returns in the U.S. federal jurisdiction and various state, local and foreign jurisdictions.  The Internal Revenue Service ("IRS") is currently auditing our fiscal year 2012 and short-year 2013 federal income tax returns. With respect to state, local and foreign jurisdictions, with limited exceptions, we are no longer subject to income tax audits for fiscal years before 2011.  We believe our recorded tax liabilities as of April 30, 2016 are sufficient to cover any potential assessments to be made by the IRS or other taxing authorities upon the completion of their examinations and we will continue to review our recorded tax liabilities for potential audit assessments based upon subsequent events, new information and future circumstances.  We believe it is reasonably possible that adjustments in the amounts of our unrecognized tax benefits could occur within the next twelve months as a result of settlements with tax authorities or expiration of statutes of 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 between the Company's and Parent's current and deferred income taxes.


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.

16

Obligations for our employee benefit plans, included in other long-term liabilities, are as follows:
(in thousands)
 
April 30,
2016
 
August 1,
2015
 
May 2,
2015
 
 
 
 
 
 
 
Pension Plan
 
$
219,108

 
$
218,612

 
$
197,358

SERP Plan
 
109,213

 
111,157

 
109,515

Postretirement Plan
 
8,986

 
9,121

 
10,777

 
 
337,307

 
338,890

 
317,650

Less: current portion
 
(6,016
)
 
(6,724
)
 
(5,814
)
Long-term portion of benefit obligations
 
$
331,291

 
$
332,166

 
$
311,836

 
Funding Policy and Plan Status.  Our policy is to fund the Pension Plan at or above the minimum level required by law.  In fiscal year 2015, we were not required to make contributions to the Pension Plan. As of April 30, 2016, we do not believe we will be required to make contributions to the Pension Plan for fiscal year 2016.  We will continue to evaluate voluntary contributions to our Pension Plan based upon the unfunded position of the Pension Plan, our available liquidity and other factors.

Cost of Benefits. The components of the expenses we incurred under our Pension Plan, SERP Plan and Postretirement Plan are as follows:
 
 
Thirteen weeks ended
 
Thirty-nine weeks ended
(in thousands)
 
April 30,
2016
 
May 2,
2015
 
April 30,
2016
 
May 2,
2015
 
 
 
 
 
 
 
 
 
Pension Plan:
 
 

 
 

 
 
 
 
Interest cost
 
$
5,429

 
$
6,382

 
$
16,287

 
$
19,146

Expected return on plan assets
 
(5,807
)
 
(6,234
)
 
(17,421
)
 
(18,702
)
Pension Plan expense (income)
 
$
(378
)
 
$
148

 
$
(1,134
)
 
$
444

 
 
 
 
 
 
 
 
 
SERP Plan:
 
 

 
 

 
 
 
 
Interest cost
 
$
892

 
$
1,126

 
$
2,676

 
$
3,378

SERP Plan expense
 
$
892

 
$
1,126

 
$
2,676

 
$
3,378

 
 
 
 
 
 
 
 
 
Postretirement Plan:
 
 

 
 

 
 
 
 
Service cost
 
$
1

 
$
3

 
$
3

 
$
9

Interest cost
 
71

 
113

 
213

 
339

Net amortization of gains
 
(146
)
 
(93
)
 
(438
)
 
(279
)
Postretirement Plan expense (income)
 
$
(74
)
 
$
23

 
$
(222
)
 
$
69



9.       Commitments and Contingencies
 
Employment and Consumer Class Actions Litigation.  On April 30, 2010, a Class Action Complaint for Injunction and Equitable Relief was filed against the Company, Newton Holding, LLC, TPG Capital, L.P. and Warburg Pincus LLC in the U.S. District Court for the Central District of California by Sheila Monjazeb, individually and on behalf of other members of the general public similarly situated. On July 12, 2010, all defendants except for the Company were dismissed without prejudice, and on August 20, 2010, this case was dismissed by Ms. Monjazeb and refiled in the Superior Court of California for San Francisco County. This complaint, along with a similar class action lawsuit originally filed by Bernadette Tanguilig in 2007, sought monetary and injunctive relief and alleged that the Company has engaged in various violations of the California Labor Code and Business and Professions Code, including without limitation, by (i) asking employees to work “off the clock,” (ii) failing to provide meal and rest breaks to its employees, (iii) improperly calculating deductions on paychecks delivered to its employees and (iv) failing to provide a chair or allow employees to sit during shifts. The Monjazeb and Tanguilig class actions were deemed “related” cases and were then brought before the same trial court judge.  On October 24, 2011, the court granted the Company’s motion to compel Ms. Monjazeb and Juan Carlos Pinela (a co-plaintiff in the Tanguilig case) to arbitrate their individual claims in accordance with the Company’s Mandatory Arbitration Agreement, foreclosing their ability to pursue a class action in court. However, the court’s order compelling arbitration did not apply to Ms. Tanguilig because she is not bound by the Mandatory Arbitration Agreement.  Further, the court determined that Ms. Tanguilig could not be a class representative of employees who are subject to the Mandatory Arbitration Agreement, thereby limiting the putative class action to those associates who were employed between December 2003 and July 15, 2007 (the effective date of our Mandatory Arbitration Agreement).  Following the court’s order, Ms. Monjazeb and Mr. Pinela filed demands

17

for arbitration with the American Arbitration Association ("AAA") seeking to arbitrate not only their individual claims, but also class claims, which the Company asserted violated the class action waiver in the Mandatory Arbitration Agreement. This led to further proceedings in the trial court, a stay of the arbitrations, and a decision by the trial court, on its own motion, to reconsider its order compelling arbitration. The trial court ultimately decided to vacate its order compelling arbitration due to a recent California appellate court decision.  Following this ruling, the Company timely filed two separate appeals, one with respect to Mr. Pinela and one with respect to Ms. Monjazeb, with the California Court of Appeal, asserting that the trial court did not have jurisdiction to change its earlier determination of the enforceability of the arbitration agreement. On June 29, 2015, after briefing and oral argument, the California Court of Appeal issued its order affirming the trial court's denial of our motion to compel arbitration and awarding Mr. Pinela his costs of appeal. On July 13, 2015, we filed our petition for rehearing with the California Court of Appeal, which was denied on July 29, 2015. On August 10, 2015, we filed our petition for review with the California Supreme Court, and Mr. Pinela filed his answer on August 31, 2015. On September 16, 2015, the California Supreme Court denied our petition for review. On October 6, 2015, the case was transferred back to the trial court. On November 16, 2015, Mr. Pinela filed a motion to stay the proceedings in the trial court until after the appellate court resolves Ms. Tanguilig’s appeal. On December 10, 2015, the hearing on Mr. Pinela's motion to stay and a case management conference were held, and the trial court judge issued an order granting the motion and issuing a stay, which currently remains in effect. The appeal with respect to Ms. Monjazeb was dismissed since final approval of the class action settlement (as described below) had been granted.

With respect to Ms. Tanguilig's case, the trial court decided to set certain of her civil penalty claims for trial on April 1, 2014. In these claims, Ms. Tanguilig sought civil penalties under the Private Attorneys General Act based on the Company's alleged failure to provide employees with meal periods and rest breaks in compliance with California law. On December 10, 2013, the Company filed a motion to dismiss all of Ms. Tanguilig’s claims, including the civil penalty claims, based on her failure to bring her claims to trial within five years as required by California law. After several hearings, on February 28, 2014, the court dismissed all of Ms. Tanguilig’s claims in the case and vacated the April 1, 2014 trial date. The court awarded the Company its costs of suit in connection with the defense of Ms. Tanguilig’s claims, but denied its request of an attorneys’ fees award from Ms. Tanguilig. Ms. Tanguilig filed a notice of appeal from the dismissal of all her claims, as well as a second notice of appeal from the award of costs, both of which are pending before the California Court of Appeal. Should the California Court of Appeal reverse the trial court’s dismissal of all of Ms. Tanguilig’s claims, the litigation will resume, and Ms. Tanguilig will seek class certification of the claims asserted in her Third Amended Complaint. If this occurs, the scope of her class claims will likely be reduced by the class action settlement and release in the Monjazeb case (as described below); however, that settlement does not cover claims asserted by Ms. Tanguilig for alleged Labor Code violations from approximately December 19, 2003 to August 20, 2006 (the beginning of the settlement class period in the Monjazeb case). Briefing on the appeals is complete, and a judicial panel has been assigned. The parties have requested oral argument, but no date has been set.

In Ms. Monjazeb's class action, a settlement was reached at a mediation held on January 25, 2014, and the court granted final approval of the settlement after the final approval hearing held on September 18, 2014. Notwithstanding the settlement of the Monjazeb class action, Ms. Tanguilig filed a motion on January 26, 2015 seeking to recover catalyst attorneys' fees from the Company. A hearing was held on February 24, 2015, and the court issued an order on February 25, 2015 allowing Ms. Tanguilig to proceed with her motion to recover catalyst attorneys' fees related to the Monjazeb settlement. On April 8, 2015, Ms. Tanguilig filed her motion for catalyst attorneys' fees. A hearing on the motion was held on July 23, 2015 and the motion was denied by the court on July 28, 2015.

Based upon the settlement agreement with respect to Ms. Monjazeb's class action claims, we recorded our currently estimable liabilities with respect to both Ms. Monjazeb's and Ms. Tanguilig's employment class actions litigation claims in fiscal year 2014, which amount was not material to our financial condition or results of operations. With respect to the Monjazeb matter, the settlement funds have been paid by the Company and have been disbursed by the claims administrator in accordance with the settlement. We will continue to evaluate the Tanguilig matter, and our recorded reserve for such matter, based on subsequent events, new information and future circumstances.

In addition to the foregoing matters, 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, which was submitted to an administrative law judge ("ALJ") for determination on a stipulated record. The ALJ issued a recommended decision and order finding that the Company's Arbitration Agreement and class action waiver violated the National Labor Relations Act ("NLRA"). The matter was transferred to the NLRB for further consideration and decision. On August 4, 2015, the NLRB affirmed the ALJ's decision and ordered the Company not to maintain and/or enforce the provisions of the Arbitration Agreement found to violate the NLRA and to take affirmative steps to effectuate the NLRA's policies. 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. On September 23, 2015, the NLRB filed a motion to hold our case in abeyance pending the Court's decisions in two other cases, which the NLRB argued presented identical issues to those before the Court in our case. On October 2, 2015, the Court issued an order granting the NLRB's motion to stay our case. On

18

June 10, 2016, the NLRB filed an unopposed motion seeking to extend the stay until the deadline for petitioning the U.S. Supreme Court for certiorari has passed in a similar case, and, if such petition is filed, until the Supreme Court resolves that case.

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 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 is allegedly of inferior quality to clothing sold at the full-line stores. Ms. Rubenstein also alleges that the Company lacks adequate information to support its comparative pricing labels. On September 12, 2014, we removed the case to the U.S. District Court for the Central District of California. On October 17, 2014, we filed a motion to dismiss the complaint, which the court granted on December 12, 2014. In its order dismissing the complaint, the court granted Ms. Rubenstein leave to file an amended complaint. Ms. Rubenstein filed her first amended complaint on December 22, 2014. On January 6, 2015, we filed a motion to dismiss the first amended complaint, which the court granted on March 2, 2015. In its order dismissing the first amended complaint, the court granted Ms. Rubenstein leave to file a second amended complaint, which she filed on March 17, 2015. On April 6, 2015, we filed a motion to dismiss the second amended complaint. On May 12, 2015, the court granted our motion to dismiss the second amended complaint in its entirety, without leave to amend, and on June 9, 2015, Ms. Rubenstein filed a notice to appeal the court's ruling. The appeal is pending and briefing is now complete, subject only to Ms. Rubenstein's filing an optional reply brief due by June 24, 2016.

On February 2, 2015, a putative class action complaint was filed against Bergdorf Goodman, Inc. in the Supreme Court of the State of New York, County of New York, by Marney Zaslav. Ms. Zaslav seeks monetary relief and alleges that she and other similarly situated individuals were misclassified as interns exempt from minimum wage requirements instead of as employees and, therefore, were not provided with proper compensation under the New York Labor Law. The Company is vigorously defending this matter.

On February 11, 2016, a putative class action first amended complaint was filed against The Neiman Marcus Group, Inc. in the Superior Court of California, Orange County, by Holly Attia and seven other named plaintiffs. They allege claims 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 the California Labor Code Private Attorney General Act ("PAGA"). Plaintiffs seek to certify a class of all nonexempt employees of the Company in California since December 31, 2011. Plaintiffs seek damages for the alleged Labor Code violations as well as restitution, statutory penalties under PAGA, and attorneys' fees, interest and costs of suit. The Company removed this matter to the U.S. District Court for the Central District of California on March 17, 2016, and subsequently filed a motion to compel arbitration as to all named plaintiffs and requested to stay the PAGA claim on April 20, 2016. On May 31, 2016, the court vacated the hearing on the motions set for June 6, 2016 and noted in planned to rule on the papers, and a decision remains pending. On June 1, 2016, a PAGA representative action was filed against The Neiman Marcus Group, Inc. in the Superior Court of California, Orange County, by Xuan Hien Nguyen pleading only PAGA claims and asserting the same factual allegations as the plaintiffs in the Attia matter.
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 position, results of operations or cash flows.

Cyber-Attack Class Actions Litigation. Three class actions relating to a cyber-attack on our computer systems in 2013 (the "Cyber-Attack") were filed in January 2014 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. Melissa Frank v. The Neiman Marcus Group, LLC, et al., was filed in the U.S. District Court for the Eastern District of New York on January 13, 2014 but was voluntarily dismissed by the plaintiff on April 15, 2014, without prejudice to her right to re-file a complaint. Donna Clark v. Neiman Marcus Group LTD LLC was filed in the U.S. District Court for the Northern District of Georgia on January 27, 2014 but was voluntarily dismissed by the plaintiff on March 11, 2014, without prejudice to her right to re-file a complaint. Christina Wong v. The Neiman Marcus Group, LLC, et al., was filed in the U.S. District Court for the Central District of California on January 29, 2014, but was voluntarily dismissed by the plaintiff on February 10, 2014, without prejudice to her right to re-file a complaint. 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, Katerina Chau v. Neiman Marcus Group LTD Inc., filed in the U.S. District Court for the Southern District of California on March 14, 2014, and Michael Shields v. The Neiman Marcus Group, LLC, filed in the U.S. District Court for the Southern District of California on April 1, 2014, were voluntarily dismissed, with prejudice as to Chau and without prejudice as to Shields. 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

19

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 on July 2, 2014. On September 16, 2014, the court granted the Company's motion to dismiss the Remijas case on the grounds that the plaintiffs lacked standing due to their failure to demonstrate an actionable injury. On September 25, 2014, plaintiffs appealed the district court's order dismissing the case to the Seventh Circuit Court of Appeals. Oral argument was held on January 23, 2015. On July 20, 2015, the Seventh Circuit Court of Appeals reversed the district court's ruling and remanded the case to the district court for further proceedings. On August 3, 2015, we filed a petition for rehearing en banc. On September 17, 2015, the Seventh Circuit Court of Appeals denied our petition for rehearing. The district court held a status conference on October 29, 2015 and set a supplemental briefing schedule on the remaining portion of our previously filed motion to dismiss that had not been addressed by the court, and scheduled a status hearing for December 15, 2015. The parties completed supplemental briefing on December 21, 2015. On January 13, 2016, the court denied the Company's motion to dismiss. Our responsive pleading was due on June 10, 2016. The parties jointly requested, and the Court granted, an extension of time for filing a responsive pleading, which is currently due on July 11, 2016. Andrew McClease v. The Neiman Marcus Group, LLC was filed in the U.S. District Court for the Eastern District of North Carolina on December 30, 2014, alleging negligence and other claims in connection with Mr. McClease's purchase by payment card. On March 9, 2015, the McClease case was voluntarily dismissed without prejudice by stipulation of the parties.

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 no outstanding irrevocable letters of credit at April 30, 2016.  We had approximately $3.4 million in surety bonds at April 30, 2016 relating primarily to merchandise imports and state sales tax and utility requirements.
 

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
Losses on
Financial
Instruments
 
Unfunded
Benefit
Obligations
 
Total
 
 
 
 
 

 
 

 
 

Balance, August 1, 2015
 
$
(16,886
)
 
$
(2,826
)
 
$
(31,516
)
 
$
(51,228
)
Other comprehensive earnings (loss)
 
116

 
823

 
(611
)
 
328

Balance, October 31, 2015
 
$
(16,770
)
 
$
(2,003
)
 
$
(32,127
)
 
$
(50,900
)
Other comprehensive loss
 
(3,415
)
 
(116
)
 
(89
)
 
(3,620
)
Balance, January 30, 2016
 
$
(20,185
)
 
$
(2,119
)
 
$
(32,216
)
 
$
(54,520
)
Other comprehensive earnings (loss)
 
5,460

 
503

 
(89
)
 
5,874

Balance, April 30, 2016
 
$
(14,725
)
 
$
(1,616
)
 
$
(32,305
)
 
$
(48,646
)
 

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

Co-Invest Options.  In connection with the Acquisition, certain executive officers of the Company rolled over a portion of the amounts otherwise payable in settlement of their pre-Acquisition stock options into stock options of Parent representing options to

20

purchase a total of 56,979 shares of Class A common stock and 56,979 shares of Class B 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 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.

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 and each grant consists of options to purchase an equal number of shares of Parent’s Class A common stock and Class B common stock.

Accounting for Stock Options. Prior to an initial public offering ("IPO"), Parent generally has the right to repurchase shares issued upon exercise of vested stock options at the fair market value and shares underlying vested unexercised stock options for the difference between the fair market value of the underlying share and the exercise price in the event the optionee ceases to be an employee of the Company. However, 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.

As a result of Parent's repurchase rights prior to an IPO, 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") using the liability method. Under the liability method, we recognize the estimated liability for option awards held by Retirement Eligible Optionees over the vesting periods of such awards and the liability for the vested/earned options is adjusted to its estimated fair value through compensation expense at each balance sheet date. 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.

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

At April 30, 2016, an aggregate of 53,782 Co-Invest Options and time-vested options were held by Retirement Eligible Optionees. The recorded liability with respect to such options was $19.8 million at April 30, 2016, $15.9 million at August 1, 2015 and $22.2 million at May 2, 2015. We recognize compensation expense, which is included in selling, general and administrative expenses, for stock options on a straight-line basis over the vesting/performance periods.


21

The following table sets forth certain summary information with respect to our stock options for the periods indicated.
 
 
Thirteen weeks ended
 
Thirty-nine weeks ended
(in thousands, except number of options and per option price)
 
April 30,
2016
 
May 2,
2015
 
April 30,
2016
 
May 2,
2015
 
 
 
 
 
 
 
 
 
Stock compensation expense
 
$
—

 
$
2,135

 
$
3,880

 
$
6,405

 
 
 
 
 
 
 
 
 
Stock option grants:
 
 

 
 

 
 

 
 
Number of options granted
 
—

 
2,240

 
4,268

 
8,243

Weighted average grant date fair value
 
$
—

 
$
363

 
$
341

 
$
335

 
 
 
 
 
 
 
 
 
Stock option exercises:
 
 

 
 

 
 

 
 
Number of options exercised
 
—

 
—

 
626

 
118

Weighted average exercise price
 
$
—

 
$
—

 
$
1,205

 
$
577


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 August 1, 2015.


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


13.       Other Expenses (Income)
 
Other expenses (income) consists of the following components:
 
 
Thirteen weeks ended
 
Thirty-nine weeks ended
(in thousands)
 
April 30,
2016
 
May 2,
2015
 
April 30,
2016
 
May 2,
2015
 
 
 
 
 
 
 
 
 
Expenses incurred in connection with strategic growth initiatives
 
$
3,599

 
$
2,202

 
$
21,870

 
$
6,495

MyTheresa acquisition costs
 
80

 
2,048

 
4,408

 
15,140

Expenses related to cyber-attack, net of insurance recoveries
 
204

 
1,321

 
889

 
4,121

Net gain from facility closure
 
(5,446
)
 
—

 
(5,446
)

—

Other expenses
 
929

 
—

 
2,791

 
2,324

Total
 
$
(634
)
 
$
5,571

 
$
24,512

 
$
28,080


We incurred professional fees and other costs in connection with our Organizing for Growth and NMG One strategic growth initiatives aggregating $3.6 million in the third quarter of fiscal year 2016 and $21.9 million in year-to-date fiscal 2016. In connection with Organizing for Growth, we eliminated approximately 500 positions across our stores, divisions and facilities on October 1, 2015 and incurred $10.2 million of severance costs.

In October 2014, we acquired MyTheresa, a luxury retailer headquartered in Munich, Germany. Acquisition costs consisted primarily of professional fees as well as adjustments of our earn-out obligations to estimated fair value at each reporting date.

We discovered in January 2014 that malicious software (malware) was clandestinely installed on our computer systems. In year-to-date fiscal 2016 and year-to-date fiscal 2015, we incurred investigative, legal and other expenses in connection with a cyber-attack.

22

We expect to incur ongoing costs related to the cyber-attack for the foreseeable future. Such expenses are not currently estimable but could be material to our future results of operations.

In the third quarter of fiscal year 2016, we recorded a $5.4 million net gain related to the closure and relocation of our regional service center in New York.


14.  Condensed Consolidating Financial Information
 
2028 Debentures.  All of NMG’s obligations under the 2028 Debentures are guaranteed by the Company.  The guarantee by the Company is full and unconditional and is subject to automatic release if the requirements for legal defeasance or covenant defeasance of the 2028 Debentures are satisfied, or if NMG’s obligations under the indenture governing the 2028 Debentures are discharged.  Currently, the Company’s non-guarantor subsidiaries under the 2028 Debentures consist 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 NMG in conducting its operations and (iii) NMG Germany GmbH, through which we conduct the operations of MyTheresa.
 
The following condensed consolidating financial information represents the financial information of the Company and its non-guarantor subsidiaries under the 2028 Debentures, 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.
 
 
April 30, 2016
(in thousands)
 
Company
 
NMG
 
Non-
 Guarantor
 Subsidiaries
 
Eliminations
 
Consolidated
ASSETS
 
 

 
 

 
 

 
 

 
 

Current assets:
 
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
 
$
—

 
$
56,257

 
$
20,025

 
$
—

 
$
76,282

Merchandise inventories
 
—

 
991,226

 
209,687

 
—

 
1,200,913

Other current assets
 
—

 
190,638

 
14,870

 
(1,378
)
 
204,130

Total current assets
 
—

 
1,238,121

 
244,582

 
(1,378
)
 
1,481,325

Property and equipment, net
 
—

 
1,405,802

 
141,937

 
—

 
1,547,739

Intangible assets, net
 
—

 
581,975

 
2,933,610

 
—

 
3,515,585

Goodwill
 
—

 
1,611,365

 
664,676

 
—

 
2,276,041

Other long-term assets
 
—

 
122,392

 
2,381

 
—

 
124,773

Intercompany notes receivable
 
—

 
196,686

 
—

 
(196,686
)
 
—

Investments in subsidiaries
 
1,417,572

 
3,599,450

 
—

 
(5,017,022
)
 
—

Total assets
 
$
1,417,572

 
$
8,755,791

 
$
3,987,186

 
$
(5,215,086
)
 
$
8,945,463

LIABILITIES AND MEMBER EQUITY
 
 

 
 

 
 

 
 

 
 

Current liabilities:
 
 

 
 

 
 

 
 

 
 

Accounts payable
 
$
—

 
$
225,277

 
$
39,450

 
$
—

 
$
264,727

Accrued liabilities
 
—

 
353,205

 
134,854

 
(1,378
)
 
486,681

Current portion of long-term debt
 
—

 
29,426

 
—

 
—

 
29,426

Total current liabilities
 
—

 
607,908

 
174,304

 
(1,378
)
 
780,834

Long-term liabilities:
 
 

 
 

 
 

 
 

 
 

Long-term debt
 
—

 
4,794,399

 
—

 
—

 
4,794,399

Intercompany notes payable
 
—

 
—

 
196,686

 
(196,686
)
 
—

Deferred income taxes
 
—

 
1,487,131

 
13,113

 
—

 
1,500,244

Other long-term liabilities
 
—

 
448,781

 
3,633

 
—

 
452,414

Total long-term liabilities
 
—

 
6,730,311

 
213,432

 
(196,686
)
 
6,747,057

Total member equity
 
1,417,572

 
1,417,572

 
3,599,450

 
(5,017,022
)
 
1,417,572

Total liabilities and member equity
 
$
1,417,572

 
$
8,755,791

 
$
3,987,186

 
$
(5,215,086
)
 
$
8,945,463


23

 
 
August 1, 2015
(in thousands)
 
Company
 
NMG
 
Non-
 Guarantor
 Subsidiaries
 
Eliminations
 
Consolidated
ASSETS
 
 

 
 

 
 

 
 

 
 

Current assets:
 
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
 
$
—

 
$
53,162

 
$
19,812

 
$
—

 
$
72,974

Merchandise inventories
 
—

 
970,295

 
184,549

 
—

 
1,154,844

Other current assets
 
—

 
138,966

 
18,082

 
(165
)
 
156,883

Total current assets
 
—

 
1,162,423

 
222,443

 
(165
)
 
1,384,701

Property and equipment, net
 
—

 
1,359,118

 
118,768

 
—

 
1,477,886

Intangible assets, net
 
—

 
625,937

 
2,972,625

 
—

 
3,598,562

Goodwill
 
—

 
1,611,365

 
661,118

 
—

 
2,272,483

Other long-term assets
 
—

 
140,776

 
1,354

 
—

 
142,130

Intercompany notes receivable
 
—

 
150,028

 
—

 
(150,028
)
 
—

Investments in subsidiaries
 
1,413,744

 
3,617,680

 
—

 
(5,031,424
)
 
—

Total assets
 
$
1,413,744

 
$
8,667,327

 
$
3,976,308

 
$
(5,181,617
)
 
$
8,875,762

LIABILITIES AND MEMBER EQUITY
 
 

 
 

 
 

 
 

 
 

Current liabilities:
 
 

 
 

 
 

 
 

 
 

Accounts payable
 
$
—

 
$
291,089

 
$
51,910

 
$
—

 
$
342,999

Accrued liabilities
 
—

 
380,255

 
85,312

 
(165
)
 
465,402

Current portion of long-term debt
 
—

 
29,426

 
—

 
—

 
29,426

Total current liabilities
 
—

 
700,770

 
137,222

 
(165
)
 
837,827

Long-term liabilities:
 
 

 
 

 
 

 
 

 
 

Long-term debt
 
—

 
4,681,309

 
—

 
—

 
4,681,309

Intercompany notes payable
 
—

 
—

 
150,028

 
(150,028
)
 
—

Deferred income taxes
 
—

 
1,454,278

 
16,813

 
—

 
1,471,091

Other long-term liabilities
 
—

 
417,226

 
54,565

 
—

 
471,791

Total long-term liabilities
 
—

 
6,552,813

 
221,406

 
(150,028
)
 
6,624,191

Total member equity
 
1,413,744

 
1,413,744

 
3,617,680

 
(5,031,424
)
 
1,413,744

Total liabilities and member equity
 
$
1,413,744

 
$
8,667,327

 
$
3,976,308

 
$
(5,181,617
)
 
$
8,875,762


24

 
 
May 2, 2015
(in thousands)
 
Company
 
NMG
 
Non-
 Guarantor
 Subsidiaries
 
Eliminations
 
Consolidated
ASSETS
 
 

 
 

 
 

 
 

 
 

Current assets:
 
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
 
$
—

 
$
70,490

 
$
11,721

 
$
—

 
$
82,211

Merchandise inventories
 
—

 
988,955

 
184,307

 
—

 
1,173,262

Other current assets
 
—

 
127,129

 
15,363

 
(102
)
 
142,390

Total current assets
 
—

 
1,186,574

 
211,391

 
(102
)
 
1,397,863

Property and equipment, net
 
—

 
1,325,068

 
114,589

 
—

 
1,439,657

Intangible assets, net
 
—

 
641,446

 
2,984,004

 
—

 
3,625,450

Goodwill
 
—

 
1,669,365

 
598,532

 
—

 
2,267,897

Other long-term assets
 
—

 
139,203

 
1,375

 
—

 
140,578

Intercompany notes receivable
 
—

 
150,000

 
—

 
(150,000
)
 
—

Investments in subsidiaries
 
1,454,710

 
3,572,692

 
—

 
(5,027,402
)
 
—

Total assets
 
$
1,454,710

 
$
8,684,348

 
$
3,909,891

 
$
(5,177,504
)
 
$
8,871,445

LIABILITIES AND MEMBER EQUITY
 
 

 
 

 
 

 
 

 
 

Current liabilities:
 
 

 
 

 
 

 
 

 
 

Accounts payable
 
$
—

 
$
246,696

 
$
33,589

 
$
—

 
$
280,285

Accrued liabilities
 
—

 
366,369

 
91,237

 
(102
)
 
457,504

Current portion of long-term debt
 
—

 
29,426

 
—

 
—

 
29,426

Total current liabilities
 
—

 
642,491

 
124,826

 
(102
)
 
767,215

Long-term liabilities:
 
 

 
 

 
 

 
 

 
 

Long-term debt
 
—

 
4,708,612

 
—

 
—

 
4,708,612

Intercompany notes payable
 
—

 
—

 
150,000

 
(150,000
)
 
—

Deferred income taxes
 
—

 
1,485,902

 
15,012

 
—

 
1,500,914

Other long-term liabilities
 
—

 
392,633

 
47,361

 
—

 
439,994

Total long-term liabilities
 
—

 
6,587,147

 
212,373

 
(150,000
)
 
6,649,520

Total member equity
 
1,454,710

 
1,454,710

 
3,572,692

 
(5,027,402
)
 
1,454,710

Total liabilities and member equity
 
$
1,454,710

 
$
8,684,348

 
$
3,909,891

 
$
(5,177,504
)
 
$
8,871,445


25

 
 
Thirteen weeks ended April 30, 2016
(in thousands)
 
Company
 
NMG
 
Non-
 Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Revenues
 
$
—

 
$
930,333

 
$
238,959

 
$
—

 
$
1,169,292

Cost of goods sold including buying and occupancy costs (excluding depreciation)
 
—

 
590,735

 
152,736

 
—

 
743,471

Selling, general and administrative expenses (excluding depreciation)
 
—

 
225,972

 
48,805

 
—

 
274,777

Income from credit card program
 
—

 
(13,604
)
 
(1,406
)
 
—

 
(15,010
)
Depreciation expense
 
—

 
53,983

 
5,633

 
—

 
59,616

Amortization of intangible assets and favorable lease commitments
 
—

 
14,198

 
13,201

 
—

 
27,399

Other expenses (income)
 
—

 
(1,822
)
 
1,188

 
—

 
(634
)
Operating earnings
 
—

 
60,871

 
18,802

 
—

 
79,673

Interest expense, net
 
—

 
71,335

 
1,340

 
—

 
72,675

Intercompany royalty charges (income)
 
—

 
36,690

 
(36,690
)
 
—

 
—

Foreign currency loss (gain)
 
—

 
—

 
(7,740
)
 
7,740

 
—

Equity in loss (earnings) of subsidiaries
 
(3,790
)
 
(59,692
)
 
—

 
63,482

 
—

Earnings (loss) before income taxes
 
3,790

 
12,538

 
61,892

 
(71,222
)
 
6,998

Income tax expense (benefit)
 
—

 
3,803

 
2,200

 
(2,795
)
 
3,208

Net earnings (loss)
 
$
3,790

 
$
8,735

 
$
59,692

 
$
(68,427
)
 
$
3,790

Total other comprehensive earnings (loss), net of tax
 
5,874

 
414

 
515

 
(929
)
 
5,874

Total comprehensive earnings (loss)
 
$
9,664

 
$
9,149

 
$
60,207

 
$
(69,356
)
 
$
9,664


 
 
Thirteen weeks ended May 2, 2015
(in thousands)
 
Company
 
NMG
 
Non-
 Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Revenues
 
$
—

 
$
977,352

 
$
242,748

 
$
—

 
$
1,220,100

Cost of goods sold including buying and occupancy costs (excluding depreciation)
 
—

 
605,313

 
149,721

 
—

 
755,034

Selling, general and administrative expenses (excluding depreciation)
 
—

 
237,511

 
48,178

 
—

 
285,689

Income from credit card program
 
—

 
(10,603
)
 
(1,296
)
 
—

 
(11,899
)
Depreciation expense
 
—

 
40,308

 
7,762

 
—

 
48,070

Amortization of intangible assets and favorable lease commitments
 
—

 
15,496

 
14,179

 
—

 
29,675

Other expenses
 
—

 
3,899

 
1,672

 
—

 
5,571

Operating earnings
 
—

 
85,428

 
22,532

 
—

 
107,960

Interest expense, net
 
—

 
72,407

 
437

 
—

 
72,844

Intercompany royalty charges (income)
 
—

 
35,624

 
(35,624
)
 
—

 
—

Foreign currency loss (gain)
 
—

 
—

 
17,748

 
(17,748
)
 
—

Equity in loss (earnings) of subsidiaries
 
(19,820
)
 
(45,095
)
 
—

 
64,915

 
—

Earnings (loss) before income taxes
 
19,820

 
22,492

 
39,971

 
(47,167
)
 
35,116

Income tax expense (benefit)
 
—

 
15,561

 
(5,124
)
 
4,859

 
15,296

Net earnings (loss)
 
$
19,820

 
$
6,931

 
$
45,095

 
$
(52,026
)
 
$
19,820

Total other comprehensive earnings (loss), net of tax
 
(14,839
)
 
868

 
(2,818
)
 
1,950

 
(14,839
)
Total comprehensive earnings (loss)
 
$
4,981

 
$
7,799

 
$
42,277

 
$
(50,076
)
 
$
4,981



26

 
 
Thirty-nine weeks ended April 30, 2016
(in thousands)
 
Company
 
NMG
 
Non-
 Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Revenues
 
$
—

 
$
3,066,164

 
$
754,985

 
$
—

 
$
3,821,149

Cost of goods sold including buying and occupancy costs (excluding depreciation)
 
—

 
2,009,842

 
495,995

 
—

 
2,505,837

Selling, general and administrative expenses (excluding depreciation)
 
—

 
715,211

 
147,562

 
—

 
862,773

Income from credit card program
 
—

 
(40,362
)
 
(4,272
)
 
—

 
(44,634
)
Depreciation expense
 
—

 
153,200

 
15,957

 
—

 
169,157

Amortization of intangible assets and favorable lease commitments
 
—

 
43,961

 
40,035

 
—

 
83,996

Other expenses
 
—

 
19,351

 
5,161

 
—

 
24,512

Operating earnings
 
—

 
164,961

 
54,547

 
—

 
219,508

Interest expense, net
 
—

 
209,090

 
6,765

 
—

 
215,855

Intercompany royalty charges (income)
 
—

 
115,445

 
(115,445
)
 
—

 
—

Foreign currency loss (gain)
 
—

 
—

 
(3,715
)
 
3,715

 
—

Equity in loss (earnings) of subsidiaries
 
(1,136
)
 
(165,703
)
 
—

 
166,839

 
—

Earnings (loss) before income taxes
 
1,136

 
6,129

 
166,942

 
(170,554
)
 
3,653

Income tax expense (benefit)
 
—

 
2,930

 
1,239

 
(1,652
)
 
2,517

Net earnings (loss)
 
$
1,136

 
$
3,199

 
$
165,703

 
$
(168,902
)
 
$
1,136

Total other comprehensive earnings (loss), net of tax
 
2,582

 
421

 
98

 
(519
)
 
2,582

Total comprehensive earnings (loss)
 
$
3,718

 
$
3,620

 
$
165,801

 
$
(169,421
)
 
$
3,718


 
 
Thirty-nine weeks ended May 2, 2015
(in thousands)
 
Company
 
NMG
 
Non-
 Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Revenues
 
$
—

 
$
3,203,081

 
$
725,335

 
$
—

 
$
3,928,416

Cost of goods sold including buying and occupancy costs (excluding depreciation)
 
—

 
2,041,854

 
460,699

 
—

 
2,502,553

Selling, general and administrative expenses (excluding depreciation)
 
—

 
755,932

 
138,734

 
—

 
894,666

Income from credit card program
 
—

 
(36,633
)
 
(4,119
)
 
—

 
(40,752
)
Depreciation expense
 
—

 
120,028

 
16,562

 
—

 
136,590

Amortization of intangible assets and favorable lease commitments
 
—

 
66,678

 
40,761

 
—

 
107,439

Other expenses
 
—

 
24,323

 
3,757

 
—

 
28,080

Operating earnings
 
—

 
230,899

 
68,941

 
—

 
299,840

Interest expense, net
 
—

 
215,675

 
2,244

 
—

 
217,919

Intercompany royalty charges (income)
 
—

 
114,650

 
(114,650
)
 
—

 
—

Foreign currency loss (gain)
 
—

 
—

 
23,940

 
(23,940
)
 
—

Equity in loss (earnings) of subsidiaries
 
(47,831
)
 
(165,244
)
 
—

 
213,075

 
—

Earnings (loss) before income taxes
 
47,831

 
65,818

 
157,407

 
(189,135
)
 
81,921

Income tax expense (benefit)
 
—

 
35,373

 
(7,837
)
 
6,554

 
34,090

Net earnings (loss)
 
$
47,831

 
$
30,445

 
$
165,244

 
$
(195,689
)
 
$
47,831

Total other comprehensive earnings (loss), net of tax
 
(25,715
)
 
(4,031
)
 
(4,298
)
 
8,329

 
(25,715
)
Total comprehensive earnings (loss)
 
$
22,116

 
$
26,414

 
$
160,946

 
$
(187,360
)
 
$
22,116








27

 
 
Thirty-nine weeks ended April 30, 2016
(in thousands)
 
Company
 
NMG
 
Non-
 Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
CASH FLOWS—OPERATING ACTIVITIES
 
 

 
 

 
 

 
 

 
 

Net earnings (loss)
 
$
1,136

 
$
3,199

 
$
165,703

 
$
(168,902
)
 
$
1,136

Adjustments to reconcile net earnings (loss) to net cash provided by (used for) operating activities:
 
 

 
 

 
 

 
 

 
 

Depreciation and amortization expense
 
—

 
215,590

 
55,992

 
—

 
271,582

Deferred income taxes
 
—

 
19,681

 
(3,896
)
 
—

 
15,785

Other
 
—

 
(7,918
)
 
12,078

 
2,063

 
6,223

Intercompany royalty income payable (receivable)
 
—

 
115,445

 
(115,445
)
 
—

 
—

Equity in loss (earnings) of subsidiaries
 
(1,136
)
 
(165,703
)
 
—

 
166,839

 
—

Changes in operating assets and liabilities, net
 
—

 
(26,894
)
 
(117,381
)
 
—

 
(144,275
)
Net cash provided by (used for) operating activities
 
—

 
153,400

 
(2,949
)
 
—

 
150,451

CASH FLOWS—INVESTING ACTIVITIES
 
 

 
 

 
 

 
 

 
 

Capital expenditures
 
—

 
(193,573
)
 
(38,420
)
 
—

 
(231,993
)
Acquisition of MyTheresa
 
—

 
—

 
(896
)
 
—

 
(896
)
Investment in subsidiaries
 
—

 
(30,204
)
 
30,204

 
—

 
—

Net cash used for investing activities
 
—

 
(223,777
)
 
(9,112
)
 
—

 
(232,889
)
CASH FLOWS—FINANCING ACTIVITIES
 
 

 
 

 
 

 
 

 
 

Borrowings under Asset-Based Revolving Credit Facility
 
—

 
495,000

 
—

 
—

 
495,000

Repayment of borrowings
 
—

 
(382,069
)
 
—

 
—

 
(382,069
)
Payment of contingent earn-out obligation
 
—

 
—

 
(27,185
)
 
—

 
(27,185
)
Intercompany notes payable (receivable)
 
—

 
(39,459
)
 
39,459

 
—

 
—

Net cash provided by financing activities
 
—

 
73,472

 
12,274

 
—

 
85,746

CASH AND CASH EQUIVALENTS
 
 

 
 

 
 

 
 

 
 

Increase during the period
 
—

 
3,095

 
213

 
—

 
3,308

Beginning balance
 
—

 
53,162

 
19,812

 
—

 
72,974

Ending balance
 
$
—

 
$
56,257

 
$
20,025

 
$
—

 
$
76,282



28

 
 
Thirty-nine weeks ended May 2, 2015
(in thousands)
 
Company
 
NMG
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
CASH FLOWS—OPERATING ACTIVITIES
 
 

 
 

 
 

 
 

 
 

Net earnings (loss)
 
$
47,831

 
$
30,445

 
$
165,244

 
$
(195,689
)
 
$
47,831

Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:
 
 

 
 

 
 

 
 

 
 

Depreciation and amortization expense
 
—

 
205,123

 
57,323

 
—

 
262,446

Deferred income taxes
 
—

 
(40,431
)
 
(8,776
)
 
—

 
(49,207
)
Other
 
—

 
2,381

 
33,581

 
(17,386
)
 
18,576

Intercompany royalty income payable (receivable)
 
—

 
114,650

 
(114,650
)
 
—

 
—

Equity in loss (earnings) of subsidiaries
 
(47,831
)
 
(165,244
)
 
—

 
213,075

 
—

Changes in operating assets and liabilities, net
 
—

 
(79,796
)
 
(77,037
)
 
—

 
(156,833
)
Net cash provided by operating activities
 
—

 
67,128

 
55,685

 
—

 
122,813

CASH FLOWS—INVESTING ACTIVITIES
 
 

 
 

 
 

 
 

 
 

Capital expenditures
 
—

 
(169,307
)
 
(13,709
)
 
—

 
(183,016
)
Acquisition of MyTheresa
 
—

 
—

 
(181,727
)
 
—

 
(181,727
)
Net cash used for investing activities
 
—

 
(169,307
)
 
(195,436
)
 
—

 
(364,743
)
CASH FLOWS—FINANCING ACTIVITIES
 
 

 
 

 
 

 
 

 
 

Borrowings under Asset-Based Revolving Credit Facility
 
—

 
480,000

 
—

 
—

 
480,000

Repayment of borrowings
 
—

 
(352,070
)
 
—

 
—

 
(352,070
)
Intercompany notes payable (receivable)
 
—

 
(150,000
)
 
150,000

 
—

 
—

Debt issuance costs paid
 
—

 
(265
)
 
—

 
—

 
(265
)
Net cash provided by (used for) financing activities
 
—

 
(22,335
)
 
150,000

 
—

 
127,665

CASH AND CASH EQUIVALENTS
 
 

 
 

 
 

 
 

 
 

Increase (decrease) during the period
 
—

 
(124,514
)
 
10,249

 
—

 
(114,265
)
Beginning balance
 
—

 
195,004

 
1,472

 
—

 
196,476

Ending balance
 
$
—

 
$
70,490

 
$
11,721

 
$
—

 
$
82,211





29

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended August 1, 2015.  Unless otherwise specified, the meanings of all defined terms in Management’s Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") are consistent with the meanings of such terms as defined in the Notes to Condensed Consolidated Financial Statements.

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward‑looking statements. In many cases, forward-looking statements can generally be identified by the use of forward-looking terminology such as “may,” “plan,” “predict,” “expect,” “estimate,” “intend,” “would,” “will,” “could,” “should,” “anticipate,” “believe,” “project” or “continue” or the negative thereof or other similar expressions.
The forward-looking statements contained in this Quarterly Report on Form 10-Q reflect our views as of the date of this Quarterly Report on Form 10-Q and are based on our expectations and beliefs concerning future events, as well as currently available data as of the date of this Quarterly Report on Form 10-Q. While we believe there is a reasonable basis for our forward-looking statements, they involve a number of risks, uncertainties, assumptions and changes in circumstances that may cause our actual results, performance or achievements to differ significantly from those expressed or implied in any forward-looking statement. Therefore, these statements are not guarantees of future events, results, performance or achievements and you should not rely on them. A variety of factors could cause our actual results to differ materially from the anticipated or expected results expressed in our forward-looking statements. Factors that could cause our actual results to differ from our expectations include, but are not limited to:
•
economic conditions that negatively impact consumer spending and demand for our merchandise;
•
our failure to anticipate, identify and respond effectively to changing consumer demands, fashion trends and consumer shopping preferences, which could adversely affect our business, financial condition and results of operations;
•
the highly competitive nature of the luxury retail industry;
•
our failure to successfully execute our omni‑channel plans, which could adversely affect our business, financial condition and results of operations;
•
the success of our advertising and marketing programs;
•
the success of the remodel, expansion and growth of our retail stores, which are subject to numerous risks, some of which are beyond our control;
•
our inability to successfully maintain a relevant and reliable omni‑channel experience for our customers, which could adversely affect our financial performance and brand image;
•
costs associated with our expansion and growth strategies, which could adversely affect our business and performance;
•
the significance of the portion of our revenues from our stores in four states, which exposes us to downturns or catastrophic occurrences in those states;
•
our dependence on our relationships with certain designers, vendors and other sources of merchandise;
•
a breach in information privacy, which could negatively impact our operations;
•
our dependence on positive perceptions of our company, which, if eroded, could adversely affect our customer and employee relationships;
•
the loss of, or disruption in, one or more of our distribution facilities, which could adversely affect our business and operations;
•
our failure to comply with, or developments in, laws, rules or regulations, which could affect our business or results of operations;

30

•
our substantial indebtedness, which could adversely affect our business, financial condition and results of operations and our ability to fulfill our obligations with respect to such indebtedness;
•
the restrictions in our debt agreements that may limit our flexibility in operating our business; and
•
other risks, uncertainties and factors set forth in Part I - Item 1A "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended August 1, 2015 as filed with the Securities and Exchange Commission on September 22, 2015.
    
The foregoing factors are not exhaustive, and new factors may emerge or changes to the foregoing factors may occur that could impact our business. Each of the forward-looking statements contained in this Quarterly Report on Form 10-Q speaks only as of the date of this Quarterly Report on Form 10-Q. Except to the extent required by law, we undertake no obligation to update or revise (publicly or otherwise) any forward-looking statements to reflect subsequent events, new information or future circumstances.
 
Overview
 
The Company is a subsidiary of Neiman Marcus Group, Inc. (f/k/a NM Mariposa Holdings, Inc.), a Delaware corporation ("Parent"), which is owned by entities affiliated with Ares Management, L.P. and Canada Pension Plan Investment Board (together, the "Sponsors") and certain co-investors.  The Company’s operations are conducted through its wholly owned subsidiary, The Neiman Marcus Group LLC ("NMG").  The Sponsors acquired the Company on October 25, 2013 (the "Acquisition").  Prior to the Acquisition, we were owned by Newton Holding, LLC, which was controlled by investment funds affiliated with TPG Global, LLC (collectively with its affiliates, "TPG") and Warburg Pincus LLC (together with TPG, the "Former Sponsors").  References made 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.

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.
 
Our fiscal year ends on the Saturday closest to July 31.  Like many other retailers, we follow a 4-5-4 reporting calendar, which means that each fiscal quarter consists of thirteen weeks divided into periods of four weeks, five weeks and four weeks.  All references to (i) the third quarter of fiscal year 2016 relate to the thirteen weeks ended April 30, 2016, (ii) the third quarter of fiscal year 2015 relate to the thirteen weeks ended May 2, 2015, (iii) year-to-date fiscal 2016 relate to the thirty-nine weeks ended April 30, 2016 and (iv) year-to-date fiscal 2015 relate to the thirty-nine weeks ended May 2, 2015.

Certain amounts presented in tables are subject to rounding adjustments and, as a result, the totals in such tables may not sum.

Strategic Growth Initiatives

We are investing in strategies to grow our revenues and profits. In October 2014, we acquired MyTheresa to expand our international footprint. Additional strategies we are pursuing include:

•
investments in technology to enhance the customer shopping experiences in both our online and store operations;
•
investments in NMG One, a new merchandising system that will enable us to purchase, share, manage and sell our inventories across channels more efficiently. We expect to substantially complete the implementation of NMG One in calendar year 2016;
•
capital investments to remodel our existing stores as well as to open new stores in select markets such as New York City (currently scheduled to open in fiscal year 2019) and Long Island, New York (opened in February 2016); and
•
re-engineering our costs to optimize our resources and organizational processes through a comprehensive review project we refer to as Organizing for Growth. In connection with Organizing for Growth, we eliminated approximately 500 positions across our stores, divisions and facilities in the first quarter of fiscal year 2016.


31

Summary of Results of Operations
 
A summary of our results of operations is as follows:

•
Revenues - Our revenues for the third quarter of fiscal year 2016 were $1,169.3 million, a decrease of 4.2% compared to the third quarter of fiscal year 2015. Comparable revenues for the third quarter of fiscal year 2016 decreased 5.0% compared to the third quarter of fiscal year 2015. In the third quarter of fiscal year 2016, revenues generated by our online operations were $347.7 million, or 29.7% of consolidated revenues. Comparable revenues from our online operations in the third quarter of fiscal year 2016, which included revenues from MyTheresa, increased 5.3% from the third quarter of the prior year.

Our year-to-date fiscal 2016 revenues were $3,821.1 million, a decrease of 2.7% compared to year-to-date fiscal 2015. Comparable revenues for year-to-date fiscal 2016 decreased 4.2% compared to year-to-date fiscal 2015. In year-to-date fiscal 2016, revenues generated by our online operations were $1,103.4 million, or 28.9% of consolidated revenues. Comparable revenues from our online operations in year-to-date fiscal 2016, which included revenues from MyTheresa beginning in the second quarter of fiscal year 2016, increased 4.9% from year-to-date fiscal 2015.
 
We believe the lower levels of revenues in the third quarter of fiscal year 2016 and in year-to-date fiscal 2016 compared to the corresponding periods of fiscal year 2015 were impacted by a number of factors, including:

•
uncertainty and volatility in both U.S. and international capital markets;
•
the strengthening of the U.S. dollar against international currencies, most notably the Euro, and a resulting decrease in tourism and spending by international customers; and
•
a significant decline in the global price of crude oil and the resulting impact on stakeholders in the oil and gas industries.

•
Cost of goods sold including buying and occupancy costs (excluding depreciation) ("COGS") - Compared to the corresponding periods of the prior year, COGS as a percentage of revenues increased 170 basis points in the third quarter of fiscal year 2016 and 190 basis points in year-to-date fiscal 2016. The increases in COGS, as a percentage of revenues, were attributable primarily to (1) decreased product margins due primarily to higher markdowns and promotional costs incurred on lower than expected revenues and (2) the deleveraging of buying and occupancy costs.

At April 30, 2016, consolidated inventories totaled $1,200.9 million, a 2.4% increase from May 2, 2015.  We are working aggressively to align our inventory levels and purchases with anticipated future customer demand.

•
Selling, general and administrative expenses (excluding depreciation) ("SG&A") - SG&A as a percentage of revenues increased 10 basis points in the third quarter of fiscal year 2016 compared to the corresponding period of the prior year. The higher levels of SG&A expenses, as a percentage of revenues, reflect primarily (1) higher levels of expenses incurred in connection with our strategic initiatives, including costs related to the opening of new stores (our store in Long Island, New York opened in February 2016), the remodeling of existing stores, investments in technology and the growth of our international revenues through MyTheresa and (2) higher selling costs due to higher levels of credit card chargebacks subsequent to regulatory changes effective October 2015 with respect to retailers' liabilities for such losses, partially offset by (3) payroll, incentive compensation and benefits expense savings realized in connection with Organizing for Growth and other efficiency initiatives.

SG&A as a percentage of revenues decreased 20 basis points in year-to-date fiscal 2016 compared to the corresponding period of the prior year. The lower levels of SG&A expenses, as a percentage of revenues, reflect primarily (1) payroll, incentive compensation and benefits expense savings realized in connection with Organizing for Growth and other efficiency initiatives, partially offset by (2) higher marketing costs, related primarily to our online operations and (3) higher levels of expenses incurred in connection with our strategic initiatives.
 
Liquidity - Net cash provided by our operating activities was $150.5 million in year-to-date fiscal 2016 compared to $122.8 million in year-to-date fiscal 2015.  We held cash balances of $76.3 million at April 30, 2016 compared to $82.2 million at May 2, 2015.  At April 30, 2016, we had $265.0 million of borrowings outstanding under the Asset-Based Revolving Credit Facility, no outstanding letters of credit and $545.0 million of unused borrowing availability.


32

Outlook - Economic conditions in the luxury retail industry have been and will continue to be impacted by a number of factors, including the rate of economic growth, uncertainty and volatility in both the U.S. and international capital markets, fluctuations in the exchange rate of the U.S. dollar against international currencies, most notably the Euro, fluctuations in crude oil and fuel prices, uncertainty regarding governmental spending and tax policies and overall consumer confidence. Such factors may adversely impact our future results of operations. As a result, we intend to operate our business in a way that balances these economic conditions and current business trends with our long-term initiatives and growth strategies.

Results of Operations
 
Performance Summary
 
The following table sets forth certain items expressed as percentages of revenues for the periods indicated.
 
 
Thirteen weeks ended
 
Thirty-nine weeks ended
 
 
April 30,
2016
 
May 2,
2015
 
April 30,
2016
 
May 2,
2015
 
 
 
 
 
 
 
 
 
Revenues
 
100.0
 %
 
100.0
 %
 
100.0
 %
 
100.0
 %
Cost of goods sold including buying and occupancy costs (excluding depreciation)
 
63.6

 
61.9

 
65.6

 
63.7

Selling, general and administrative expenses (excluding depreciation)
 
23.5

 
23.4

 
22.6

 
22.8

Income from credit card program
 
(1.3
)
 
(1.0
)
 
(1.2
)
 
(1.0
)
Depreciation expense
 
5.1

 
3.9

 
4.4

 
3.5

Amortization of intangible assets
 
1.2

 
1.3

 
1.1

 
1.7

Amortization of favorable lease commitments
 
1.1

 
1.1

 
1.1

 
1.0

Other expenses (income)
 
(0.1
)
 
0.5

 
0.6

 
0.7

Operating earnings
 
6.8

 
8.8

 
5.7

 
7.6

Interest expense, net
 
6.2

 
6.0

 
5.6

 
5.5

Earnings before income taxes
 
0.6

 
2.9

 
0.1

 
2.1

Income tax expense
 
0.3

 
1.3

 
0.1

 
0.9

Net earnings
 
0.3
 %
 
1.6
 %
 
—
 %
 
1.2
 %

Set forth in the following table is certain summary information with respect to our operations for the periods indicated.
 
 
Thirteen weeks ended
 
Thirty-nine weeks ended
(in millions, except sales per square foot and store count)
 
April 30,
2016
 
May 2,
2015
 
April 30,
2016
 
May 2,
2015
 
 
 
 
 
 
 
 
 
Change in comparable revenues (1)
 
 
 
 

 
 
 
 
Total revenues
 
(5.0
)%
 
2.2
%
 
(4.2
)%
 
4.5
%
Online revenues
 
5.3
 %
 
13.3
%
 
4.9
 %
 
14.6
%
 
 
 
 
 
 
 
 
 
Store count
 
 

 
 

 
 

 
 
Neiman Marcus and Bergdorf Goodman full-line stores open at end of period
 
44

 
43

 
44

 
43

Last Call stores open at end of period
 
42

 
42

 
42

 
42

 
 
 
 
 
 
 
 
 
Sales per square foot (2)
 
$
127

 
$
140

 
$
425

 
$
457

Percentage of revenues transacted online
 
29.7
 %
 
27.1
%
 
28.9
 %
 
25.8
%
 
 
 
 
 
 
 
 
 
Capital expenditures (3)
 
$
78.2

 
$
63.6

 
$
232.0

 
$
183.0

Depreciation expense
 
59.6

 
48.1

 
169.2

 
136.6

Rent expense and related occupancy costs
 
26.6

 
28.0

 
85.5

 
85.9

 
 
 
 
 
 
 
 
 
Non-GAAP financial measures
 
 

 
 

 
 
 
 
EBITDA (4)
 
$
166.7

 
$
185.7

 
$
472.7

 
$
543.9

Adjusted EBITDA (4)
 
$
173.2

 
$
202.6

 
$
520.4

 
$
602.7

 

33

(1)
Comparable revenues include (i) revenues derived from our retail stores open for more than fifty-two weeks, including stores that have been relocated or expanded, and (ii) revenues from our online operations.  Comparable revenues exclude revenues of (i) closed stores, including our Last Call store in Primm, Nevada, which we closed in January 2016, and (ii) designer websites created and operated pursuant to contractual arrangements with certain designer brands that had expired by the first quarter of fiscal year 2015. As MyTheresa was acquired in October 2014, comparable revenues for fiscal year 2015 exclude revenues from MyTheresa. Comparable revenues for year-to-date fiscal 2016 include revenues from MyTheresa beginning in the second quarter of fiscal year 2016.

(2) 
Sales per square foot are calculated as revenues of our Neiman Marcus and Bergdorf Goodman full-line stores for the applicable period divided by weighted average square footage.  Weighted average square footage includes a percentage of period-end square footage for new and closed stores equal to the percentage of the period during which they were open.

(3)
Amounts represent gross capital expenditures and exclude developer contributions of $14.2 million for the thirteen weeks ended April 30, 2016, $17.6 million for the thirteen weeks ended May 2, 2015, $32.3 million for the thirty-nine weeks ended April 30, 2016 and $30.5 million for the thirty-nine weeks ended May 2, 2015.
 
(4) 
For an explanation of EBITDA and Adjusted EBITDA as measures of our operating performance and a reconciliation to net earnings, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Non-GAAP Financial Measures.”

Key Factors Affecting Our Results
 
Revenues.  We generate our revenues from the sale of luxury merchandise.  Components of our revenues include:

•
Sales of merchandise—Revenues are recognized at the later of the point-of-sale or the delivery of goods to the customer.  Revenues are reduced when our customers return goods previously purchased.  We maintain reserves for anticipated sales returns based primarily on our historical trends.  Revenues exclude sales taxes collected from our customers.
•
Delivery and processing—We generate revenues from delivery and processing charges related to certain merchandise deliveries to our customers.
 
Our revenues can be affected by the following factors:

•
general economic and industry conditions, including inflation, deflation, changes related to the value of the U.S. dollar relative to foreign currencies, interest rates and rates of economic growth, current and expected unemployment levels and government fiscal and monetary policies;
•
the performance of the financial, equity and credit markets;
•
consumer disposable income levels, consumer confidence levels, the availability, cost and level of consumer debt and consumer behaviors towards incurring and paying debt;
•
changes in prices for commodities and energy, including fuel;
•
current and expected tax rates and policies;
•
changes in the level of consumer spending generally and, specifically, on luxury goods;
•
our ability to anticipate, identify and respond effectively to changing consumer demands, fashion trends and consumer shopping preferences and acquire goods meeting customers’ tastes and preferences;
•
changes in the level of full-price sales;
•
changes in the level and timing of promotional events conducted;
•
changes in the level of delivery and processing revenues collected from our customers;
•
our ability to successfully implement our expansion and growth strategies; and
•
changes in the composition and the rate of growth of our sales transacted in store and online.
 

34

In addition, our revenues are seasonal, as discussed below under “Seasonality.”
 
Cost of goods sold including buying and occupancy costs (excluding depreciation).  COGS consists of the following components:

•
Inventory costs—We utilize the retail inventory method of accounting.  Under the retail inventory method, the valuation of inventories at cost and the resulting gross margins are determined by applying a calculated cost-to-retail ratio, for various groupings of similar items, to the retail value of our inventories.  The cost of the inventory reflected on the Condensed Consolidated Financial Statements is decreased by charges to cost of goods sold at average cost and the retail value of the inventory is lowered through the use of markdowns.  Earnings are negatively impacted when merchandise is marked down.  With the introduction of new fashions in the first and third fiscal quarters of each fiscal year and our emphasis on full-price selling in these quarters, a lower level of markdowns and higher margins are characteristic of these quarters.
•
Buying costs—Buying costs consist primarily of salaries and expenses incurred by our merchandising and buying operations.
•
Occupancy costs—Occupancy costs consist primarily of rent, property taxes and operating costs of our retail, distribution and support facilities.  A significant portion of our buying and occupancy costs are fixed in nature and are not dependent on the revenues we generate.
•
Delivery and processing costs—Delivery and processing costs consist primarily of delivery charges we pay to third party carriers and other costs related to the fulfillment of customer orders not delivered at the point-of-sale.

Consistent with industry business practice, we receive allowances from certain of our vendors in support of the merchandise we purchase for resale.  Certain allowances are received to reimburse us for markdowns taken or to support the gross margins that we earn in connection with the sales of the vendor’s merchandise.  These allowances result in an increase to gross margin when we earn the allowances and they are approved by the vendor.  Other allowances we receive represent reductions to the amounts we pay to acquire the merchandise.  These allowances reduce the cost of the acquired merchandise and are recognized at the time the goods are sold.  We received vendor allowances of $5.9 million, or 0.5% of revenues, in the third quarter of fiscal year 2016; $7.5 million, or 0.6% of revenues, in the third quarter of fiscal year 2015; $58.0 million, or 1.5% of revenues, in year-to-date fiscal 2016; and $55.0 million, or 1.4% of revenues, in year-to-date fiscal 2015.  The amounts of vendor allowances we receive fluctuate based on the level of markdowns taken and did not have a significant impact on the year-over-year change in gross margin during year-to-date fiscal 2016 and 2015.

Changes in our COGS as a percentage of revenues can be affected by the following factors:

•
our ability to order an appropriate amount of merchandise to match customer demand and the related impact on the level of net markdowns and promotions costs incurred;
•
customer acceptance of and demand for the merchandise we offer in a given season and the related impact of such factors on the level of full-price sales;
•
factors affecting revenues generally, including pricing and promotional strategies, product offerings and actions taken by competitors;
•
changes in delivery and processing costs and our ability to pass such costs on to our customers;
•
changes in occupancy costs associated primarily with the opening of new stores or distribution facilities; and
•
the amount of vendor reimbursements we receive during the reporting period.
 
Selling, general and administrative expenses (excluding depreciation).  SG&A consists principally of costs related to employee compensation and benefits in the selling and administrative support areas and advertising and marketing costs.  A significant portion of our SG&A expenses is variable in nature and is dependent on the revenues we generate.
 
Advertising costs consist primarily of (i) online marketing costs, (ii) advertising costs incurred related to the production of the photographic content for our websites and (iii) costs incurred related to the production, printing and distribution of our print catalogs and other promotional materials mailed to our customers.  We receive advertising allowances from certain of our merchandise vendors.  Substantially all the advertising allowances we receive represent reimbursements of direct, specific and incremental costs that we incur to promote the vendor’s merchandise in connection with our various advertising programs, primarily catalogs and other print media.  Advertising allowances fluctuate based on the level of advertising expenses incurred and are recorded as a

35

reduction of our advertising costs when earned.  Advertising allowances were approximately $17.5 million, or 1.5% of revenues, in the third quarter of fiscal year 2016; $17.6 million, or 1.4% of revenues, in the third quarter of fiscal year 2015; $49.1 million, or 1.3% of revenues, in year-to-date fiscal 2016; and $47.9 million, or 1.2% of revenues, in year-to-date fiscal 2015.
 
We also receive allowances from certain merchandise vendors in connection with compensation programs for employees who sell the vendor’s merchandise.  These allowances are netted against the related compensation expenses that we incur.  Amounts received from vendors related to compensation programs were $17.9 million, or 1.5% of revenues, in the third quarter of fiscal year 2016; $19.4 million, or 1.6% of revenues, in the third quarter of fiscal year 2015; $53.7 million, or 1.4% of revenues, in year-to-date fiscal 2016; and $59.3 million, or 1.5% of revenues, in year-to-date fiscal 2015.

Changes in our SG&A expenses are affected primarily by the following factors:

•
changes in the level of our revenues;
•
changes in the number of sales associates, which are due primarily to new store openings and expansion of existing stores, and the health care and related benefits expenses incurred as a result of such changes;
•
changes in expenses incurred in connection with our advertising and marketing programs; and
•
changes in expenses related to employee benefits due to general economic conditions such as rising health care costs.
 
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.  Pursuant to the Program Agreement, Capital One currently offers credit cards and non-card payment plans under both the "Neiman Marcus" and "Bergdorf Goodman" brand names.

We receive payments from Capital One based on sales transacted on our proprietary credit cards.  We recognize income from our credit card program when earned.  In the future, the income from our credit card program may:

•
increase or decrease based upon the level of utilization of our proprietary credit cards by our customers;
•
increase or decrease based upon the overall profitability and performance of the credit card portfolio due to the level of bad debts incurred or changes in interest rates, among other factors;
•
increase or decrease based upon future changes to our credit card program in response to changes in regulatory requirements or other changes related to, among other things, the interest rates applied to unpaid balances and the assessment of late fees; and
•
decrease based upon the level of future marketing and other services we provide to Capital One.

Effective income tax rate. Our effective income tax rate may fluctuate from period to period due to a variety of factors, including changes in our assessment of certain tax contingencies, valuation allowances, changes in federal, state and foreign tax laws, outcomes of administrative audits, the impact of accounting for stock-based compensation, changes in our corporate structure, the impact of other discrete or non-recurring items and the mix of earnings among our U.S. and foreign operations, where the statutory rates are generally lower than in the United States. As a result, our effective income tax rate may vary significantly from the federal statutory tax rate.

Seasonality
 
We conduct our selling activities in two primary selling seasons—Fall and Spring.  The Fall season is comprised of our first and second fiscal quarters and the Spring season is comprised of our third and fourth fiscal quarters.
 
Our first fiscal quarter is generally characterized by a higher level of full-price sales with a focus on the initial introduction of Fall season fashions.  Marketing activities designed to stimulate customer purchases, a lower level of markdowns and higher margins are characteristic for this quarter.  Our second fiscal quarter is more focused on promotional activities related to the December holiday season, the early introduction of resort season collections from certain designers and the sale of Fall season goods on a marked down basis.  As a result, margins are typically lower in our second fiscal quarter.  However, due to the seasonal increase in revenues that occurs during the holiday season, our second fiscal quarter is typically the quarter in which our revenues are the highest and in which expenses as a percentage of revenues are the lowest.  Our working capital requirements are also the greatest in the first and second fiscal quarters as a result of higher seasonal requirements.
 

36

Our third fiscal quarter is generally characterized by a higher level of full-price sales with a focus on the initial introduction of Spring season fashions.  Marketing activities designed to stimulate customer purchases, a lower level of markdowns and higher margins are again characteristic for this quarter.  Revenues are generally the lowest in our fourth fiscal quarter with a focus on promotional activities offering Spring season goods to customers on a marked down basis, resulting in lower margins during the quarter.  Our working capital requirements are typically lower in our third and fourth fiscal quarters compared to the other quarters.
 
A large percentage of our merchandise assortment, particularly in the apparel, fashion accessories and shoe categories, is ordered months in advance of the introduction of such goods.  For example, women’s apparel, men’s apparel, shoes and handbags are typically ordered six to nine months in advance of the products being offered for sale while jewelry and other categories are typically ordered three to six months in advance.  As a result, our success depends in large part on our ability to anticipate and identify fashion trends and consumer shopping preferences and to identify and react effectively to rapidly changing consumer demands in a timely manner.
 
We monitor the sales performance of our inventories throughout each season.  We seek to order additional goods to supplement our original purchasing decisions when the level of customer demand is higher than originally anticipated.  However, in certain merchandise categories, particularly fashion apparel, our ability to purchase additional goods can be limited.  This can result in lost sales opportunities in the event of higher than anticipated demand for the merchandise we offer or a higher than anticipated level of consumer spending.  Conversely, in the event we buy merchandise that is not accepted by our customers or the level of consumer spending is less than we anticipated, we could incur a higher than anticipated level of markdowns, net of vendor allowances, resulting in lower operating profits.  Any failure on our part to anticipate, identify and respond effectively to these changes could adversely affect our business, financial condition and results of operations.
 
Results of Operations for the Thirteen Weeks Ended April 30, 2016 Compared to the Thirteen Weeks Ended May 2, 2015
 
Revenues.  Our revenues for the third quarter of fiscal year 2016 of $1,169.3 million decreased by $50.8 million, or 4.2%, from $1,220.1 million in the third quarter of fiscal year 2015. Comparable revenues for the third quarter of fiscal year 2016 decreased 5.0% compared to the third quarter of fiscal year 2015.  In addition, revenues generated by our online operations were $347.7 million, or 29.7% of consolidated revenues. Comparable revenues from our online operations in the third quarter of fiscal year 2016, which included revenues from MyTheresa, increased 5.3% from the third quarter of the prior year.

Cost of goods sold including buying and occupancy costs (excluding depreciation). COGS increased to 63.6% of revenues in the third quarter of fiscal year 2016 from 61.9% of revenues in the third quarter of fiscal year 2015. Compared to the prior year, COGS as a percentage of revenues increased by 170 basis points due primarily to:

•
decreased product margins of approximately 160 basis points due primarily to higher markdowns and promotional costs incurred on lower than expected revenues; and
•
the deleveraging of buying and occupancy costs of approximately 20 basis points.

Selling, general and administrative expenses (excluding depreciation).  SG&A expenses as a percentage of revenues increased to 23.5% of revenues in the third quarter of fiscal year 2016 compared to 23.4% of revenues in the third quarter of fiscal year 2015.  SG&A expenses as a percentage of revenues increased by 10 basis points in the third quarter of fiscal year 2016 due primarily to:

•
higher levels of expenses of approximately 60 basis points incurred in connection with our strategic initiatives, including costs related to the opening of new stores (our store in Long Island, New York opened in February 2016), the remodeling of existing stores, investments in technology and the growth of our international revenues through MyTheresa; and
•
higher selling costs of approximately 20 basis points due to higher levels of credit card chargebacks subsequent to regulatory changes effective October 2015 with respect to retailers' liabilities for such losses; partially offset by
•
payroll, incentive compensation and benefits expense savings realized of approximately 70 basis points in connection with Organizing for Growth and other efficiency initiatives.

Income from credit card program.  Income from our credit card program was $15.0 million, or 1.3% of revenues, in the third quarter of fiscal year 2016 compared to $11.9 million, or 1.0% of revenues, in the third quarter of fiscal year 2015.

Compared to the prior year, income from our credit card program as a percentage of revenues increased by 30 basis points due primarily to increases in both the overall profitability of the credit card portfolio and the portion of income contractually allocable to the Company.

37

 
Depreciation and amortization expenses.  Depreciation expense was $59.6 million, or 5.1% of revenues, in the third quarter of fiscal year 2016 compared to $48.1 million, or 3.9% of revenues, in the third quarter of fiscal year 2015. The increase in depreciation expense in the third quarter of fiscal year 2016 compared to the third quarter of the prior fiscal year was driven by a higher level of capital spending since the Acquisition related to new stores, store remodels and omni-channel initiatives.

Amortization of intangible assets (primarily customer lists and favorable lease commitments) was $27.4 million, or 2.3% of revenues, in the third quarter of fiscal year 2016 compared to $29.7 million, or 2.4% of revenues, in the third quarter of fiscal year 2015. 

Other expenses (income).  Other income for the third quarter of fiscal year 2016 was $0.6 million, or 0.1% of revenues, compared to expenses of $5.6 million, or 0.5% of revenues, in the third quarter of fiscal year 2015. Other expenses (income) consisted of the following components:
 
 
Thirteen weeks ended
(in millions)
 
April 30,
2016
 
May 2,
2015
 
 
 
 
 
Expenses incurred in connection with strategic growth initiatives
 
$
3.6

 
$
2.2

MyTheresa acquisition costs
 
0.1

 
2.0

Expenses related to cyber-attack, net of insurance recoveries
 
0.2

 
1.3

Net gain from facility closure
 
(5.4
)
 
—

Other expenses
 
0.9

 
—

Total
 
$
(0.6
)
 
$
5.6


We incurred professional fees and other costs in connection with our Organizing for Growth and NMG One strategic growth initiatives aggregating $3.6 million in the third quarter of fiscal year 2016.

In October 2014, we acquired MyTheresa, a luxury retailer headquartered in Munich, Germany. Acquisition costs consisted primarily of professional fees as well as adjustments of our earn-out obligations to estimated fair value at each reporting date.

We discovered in January 2014 that malicious software (malware) was clandestinely installed on our computer systems. In the third quarter of fiscal year 2016 and the third quarter of fiscal year 2015, we incurred investigative, legal and other expenses in connection with a cyber-attack. We expect to incur ongoing costs related to the cyber-attack for the foreseeable future. Such expenses are not currently estimable but could be material to our future results of operations.

In the third quarter of fiscal year 2016, we recorded a $5.4 million net gain related to the closure and relocation of our regional service center in New York.

Interest expense.  Net interest expense was $72.7 million, or 6.2% of revenues, in the third quarter of fiscal year 2016 and $72.8 million, or 6.0% of revenues, for the third quarter of fiscal year 2015. The significant components of interest expense are as follows:
 
 
Thirteen weeks ended
(in millions)
 
April 30,
2016
 
May 2,
2015
 
 
 
 
 
Asset-Based Revolving Credit Facility
 
$
0.8

 
$
0.4

Senior Secured Term Loan Facility
 
31.0

 
31.3

Cash Pay Notes
 
19.2

 
19.2

PIK Toggle Notes
 
13.1

 
13.1

2028 Debentures
 
2.2

 
2.2

Amortization of debt issue costs
 
6.1

 
6.1

Other, net
 
1.5

 
0.9

Capitalized interest
 
(1.3
)
 
(0.5
)
Interest expense, net
 
$
72.7

 
$
72.8

  
Income tax expense.  Our effective income tax rate was 45.8% for the third quarter of fiscal year 2016 and 43.6% for the third quarter of fiscal year 2015. Our effective income tax rates exceeded the federal statutory tax rate of 35.0% due primarily to:

38


•
state income taxes; and
•
the non-deductible portion of transaction and other costs incurred in connection with the MyTheresa acquisition.
We file income tax returns in the U.S. federal jurisdiction and various state, local and foreign jurisdictions.  The Internal Revenue Service ("IRS") is currently auditing our fiscal year 2012 and short-year 2013 federal income tax returns.  With respect to state, local and foreign jurisdictions, with limited exceptions, we are no longer subject to income tax audits for fiscal years before 2011.  We believe our recorded tax liabilities as of April 30, 2016 are sufficient to cover any potential assessments to be made by the IRS or other taxing authorities upon the completion of their examinations and we will continue to review our recorded tax liabilities for potential audit assessments based upon subsequent events, new information and future circumstances.  We believe it is reasonably possible that adjustments in the amounts of our unrecognized tax benefits could occur within the next twelve months as a result of settlements with tax authorities or expiration of statutes of limitations.  At this time, we do not believe such adjustments will have a material impact on our Condensed Consolidated Financial Statements.

Results of Operations for the Thirty-nine Weeks Ended April 30, 2016 Compared to the Thirty-nine Weeks Ended May 2, 2015
 
Revenues.  Our revenues for year-to-date fiscal 2016 of $3,821.1 million decreased by $107.3 million, or 2.7%, from $3,928.4 million in year-to-date fiscal 2015.  Comparable revenues for year-to-date fiscal 2016 decreased 4.2% compared to the year-to-date fiscal 2015. In addition, revenues generated by our online operations were $1,103.4 million, or 28.9% of consolidated revenues. Comparable revenues from our online operations in year-to-date fiscal 2016, which included the revenues of MyTheresa beginning in the second quarter of fiscal year 2016, increased 4.9% from the prior year fiscal period. Changes in comparable revenues for our last seven fiscal quarters were:
Fiscal year 2016
 
 
Third quarter
 
(5.0
)%
Second quarter
 
(2.4
)
First quarter
 
(5.6
)
 
 
 
Fiscal year 2015
 
 
Fourth quarter
 
1.9

Third quarter
 
2.2

Second quarter
 
5.6

First quarter
 
5.5


In the last five quarters ended April 30, 2016, we generated lower levels of comparable revenue increases than in our first and second quarters of fiscal year 2015. We believe the lower levels of comparable revenues were impacted by a number of factors including uncertainty and volatility in both U.S. and international capital markets, the strengthening of the U.S. dollar against international currencies, most notably the Euro, a resulting decrease in tourism and spending by international customers and a significant decline in the global price of crude oil and the resulting impact on stakeholders in the oil and gas industries. We believe that these factors began having a more significant impact beginning in our third quarter of fiscal year 2015 and, as a result, growth in our comparable revenues versus prior year periods began decreasing at such time, a trend which has continued into our third fiscal quarter of 2016.

Cost of goods sold including buying and occupancy costs (excluding depreciation). COGS increased to 65.6% of revenues in year-to-date fiscal 2016 from 63.7% of revenues in year-to-date fiscal 2015. Compared to the prior year, COGS as a percentage of revenues increased by 190 basis points due primarily to:

•
decreased product margins of approximately 170 basis points due primarily to higher markdowns and promotional costs incurred on lower than expected revenues; and
•
the deleveraging of buying and occupancy costs of approximately 20 basis points.

Selling, general and administrative expenses (excluding depreciation).  SG&A expenses as a percentage of revenues decreased to 22.6% of revenues in year-to-date fiscal 2016 compared to 22.8% of revenues in year-to-date fiscal 2015.  SG&A expenses as a percentage of revenues decreased by 20 basis points in year-to-date fiscal 2016 due primarily to:

•
payroll, incentive compensation and benefits expense savings realized of approximately 70 basis points in connection with Organizing for Growth and other efficiency initiatives; partially offset by

39

•
higher marketing costs, related primarily to our online operations, of approximately 30 basis points; and
•
higher levels of expenses of approximately 20 basis points incurred in connection with our strategic initiatives.

Income from credit card program.  Income from our credit card program was $44.6 million, or 1.2% of revenues, in year-to-date fiscal 2016 compared to $40.8 million, or 1.0% of revenues, in year-to-date fiscal 2015.

Compared to the prior year, income from our credit card program as a percentage of revenues increased by 20 basis points due primarily to increases in both the overall profitability of the credit card portfolio and the portion of income contractually allocable to the Company.
 
Depreciation and amortization expenses.  Depreciation expense was $169.2 million, or 4.4% of revenues, in year-to-date fiscal 2016 compared to $136.6 million, or 3.5% of revenues, in year-to-date fiscal 2015. The increase in depreciation expense in year-to-date fiscal 2016 compared to year-to-date fiscal 2015 was driven by a higher level of capital spending since the Acquisition related to new stores, store remodels and omni-channel initiatives.

Amortization of intangible assets (primarily customer lists and favorable lease commitments) was $84.0 million, or 2.2% of revenues, in year-to-date fiscal 2016 compared to $107.4 million, or 2.7% of revenues, in year-to-date fiscal 2015. Amortization expense as a percentage of revenues decreased by 50 basis points in year-to-date fiscal 2016 due to lower amortization charges with respect to our customer lists. Our customer lists are amortized using accelerated methods which reflect the pattern in which we receive the economic benefit of the asset.
 
Other expenses.  Other expenses for year-to-date fiscal 2016 aggregated $24.5 million, or 0.6% of revenues, compared to $28.1 million, or 0.7% of revenues, in year-to-date fiscal 2015.  Other expenses consisted of the following components:
 
 
Thirty-nine weeks ended
(in millions)
 
April 30,
2016
 
May 2,
2015
 
 
 
 
 
Expenses incurred in connection with strategic growth initiatives
 
$
21.9

 
$
6.5

MyTheresa acquisition costs
 
4.4

 
15.1

Expenses related to cyber-attack, net of insurance recoveries
 
0.9

 
4.1

Net gain from facility closure
 
(5.4
)
 
—

Other expenses
 
2.8

 
2.3

Total
 
$
24.5

 
$
28.1


We incurred professional fees and other costs in connection with our Organizing for Growth and NMG One strategic growth initiatives aggregating $21.9 million in year-to-date fiscal 2016. In connection with Organizing for Growth, we eliminated approximately 500 positions across our stores, divisions and facilities on October 1, 2015 and incurred $10.2 million of severance costs.

In October 2014, we acquired MyTheresa, a luxury retailer headquartered in Munich, Germany. Acquisition costs consisted primarily of professional fees as well as adjustments of our earn-out obligations to estimated fair value at each reporting date.

We discovered in January 2014 that malicious software (malware) was clandestinely installed on our computer systems. In year-to-date fiscal 2016 and year-to-date fiscal 2015, we incurred investigative, legal and other expenses in connection with a cyber-attack. We expect to incur ongoing costs related to the cyber-attack for the foreseeable future. Such expenses are not currently estimable but could be material to our future results of operations.

In the third quarter of fiscal year 2016, we recorded a $5.4 million net gain related to the closure and relocation of our regional service center in New York.
Interest expense.  Net interest expense was $215.9 million, or 5.6% of revenues, in year-to-date fiscal 2016 and $217.9 million, or 5.5% of revenues, for year-to-date fiscal 2015. The significant components of interest expense are as follows:

40

 
 
Thirty-nine weeks ended
(in millions)
 
April 30,
2016
 
May 2,
2015
 
 
 
 
 
Asset-Based Revolving Credit Facility
 
$
2.4

 
$
1.1

Senior Secured Term Loan Facility
 
93.3

 
94.3

Cash Pay Notes
 
57.6

 
57.6

PIK Toggle Notes
 
39.4

 
39.4

2028 Debentures
 
6.7

 
6.7

Amortization of debt issue costs
 
18.4

 
18.4

Other, net
 
2.7

 
2.1

Capitalized interest
 
(4.6
)
 
(1.7
)
Interest expense, net
 
$
215.9

 
$
217.9

 
Income tax expense.  Our effective income tax rate was 68.9% for year-to-date fiscal 2016 and 41.6% for year-to-date fiscal 2015. Our effective income tax rates exceeded the federal statutory tax rate of 35.0% due primarily to:

•
state income taxes;
•
the non-deductible portion of transaction and other costs incurred in connection with the MyTheresa acquisition;
•
the impact of the application of our estimated effective tax rate in fiscal year 2016 to our year-to-date quarterly periods (consisting of both loss and income generating periods); and
•
with respect to year-to-date fiscal 2016, reductions in our estimated tax reserves due to the expiration of statutes of limitations.

Non-GAAP Financial Measures
 
To supplement our financial information presented in accordance with U.S. generally accepted accounting principles ("GAAP"), we use EBITDA and Adjusted EBITDA to monitor and evaluate the performance of our business and believe the presentation of these measures enhances investors’ ability to analyze trends in our business and evaluate our performance relative to other companies in our industry. We define (i) EBITDA as earnings before interest, taxes, depreciation and amortization and (ii) Adjusted EBITDA as earnings before interest, taxes, depreciation and amortization, further adjusted to eliminate the effects of items management does not believe are representative of our ongoing performance. These financial metrics are not presentations made in accordance with GAAP.
 
EBITDA and Adjusted EBITDA should not be considered as alternatives to operating earnings or net earnings as measures of operating performance. In addition, EBITDA and Adjusted EBITDA are not presented as and should not be considered as alternatives to cash flows as measures of liquidity. EBITDA and Adjusted EBITDA have important limitations as analytical tools and should not be considered in isolation, or as a substitute for analysis of our results as reported under GAAP. These limitations include the fact that:

•
EBITDA and Adjusted EBITDA:

•
exclude certain tax payments that may represent a reduction in cash available to us;
•
in the case of Adjusted EBITDA, exclude certain adjustments for purchase accounting;
•
do not reflect changes in, or cash requirements for, our working capital needs, capital expenditures or contractual commitments;
•
do not reflect our significant interest expense; and
•
do not reflect the cash requirements necessary to service interest or principal payments on our debt.

•
although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements; and

41

•
other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as comparative measures.
 
In calculating these financial measures, we make certain adjustments that are based on assumptions and estimates that may prove inaccurate. In addition, in the future we may incur expenses similar to those eliminated in this presentation. The following table reconciles net earnings as reflected in our Condensed Consolidated Statements of Operations prepared in accordance with GAAP to EBITDA and Adjusted EBITDA:
 
 
Thirteen weeks ended
 
Thirty-nine weeks ended
(dollars in millions)
 
April 30,
2016
 
May 2,
2015
 
April 30,
2016
 
May 2,
2015
 
 
 
 
 
 
 
 
 
Net earnings
 
$
3.8

 
$
19.8

 
$
1.1

 
$
47.8

Income tax expense
 
3.2

 
15.3

 
2.5

 
34.1

Interest expense, net
 
72.7

 
72.8

 
215.9

 
217.9

Depreciation expense
 
59.6

 
48.1

 
169.2

 
136.6

Amortization of intangible assets and favorable lease commitments
 
27.4

 
29.7

 
84.0

 
107.4

EBITDA
 
$
166.7

 
$
185.7

 
$
472.7

 
$
543.9

EBITDA as a percentage of revenues
 
14.3
%
 
15.2
%
 
12.4
%
 
13.8
%
 
 
 
 
 
 
 
 
 
Amortization of inventory step-up
 
—

 
3.5

 
—

 
6.8

Incremental rent expense
 
2.5

 
2.7

 
7.9

 
8.2

MyTheresa acquisition costs
 
0.1

 
2.0

 
4.4

 
15.1

Non-cash stock-based compensation
 
—

 
2.1

 
3.9

 
6.4

Expenses related to cyber-attack, net of insurance recoveries
 
0.2

 
1.3

 
0.9

 
4.1

Expenses incurred in connection with openings of new stores / remodels of existing stores
 
4.6

 
3.0

 
11.5

 
9.3

Expenses incurred in connection with strategic growth initiatives
 
3.6

 
2.2

 
21.9

 
6.5

Net gain from facility closure
 
(5.4
)
 
—

 
(5.4
)
 
—

Other expenses
 
0.9

 
—

 
2.8

 
2.3

Adjusted EBITDA
 
$
173.2

 
$
202.6

 
$
520.4

 
$
602.7

Adjusted EBITDA as a percentage of revenues
 
14.8
%
 
16.6
%
 
13.6
%
 
15.3
%

Adjusted EBITDA as a percentage of revenues decreased by 180 basis points in the third quarter of fiscal year 2016 compared to the third quarter of fiscal year 2015 and decreased by 170 basis points in year-to-date fiscal 2016 compared to year-to-date fiscal 2015. These decreases were driven primarily by (1) an increase in COGS driven by higher markdowns and promotional costs, (2) the deleveraging of buying and occupancy costs on lower revenues, (3) higher marketing costs, related primarily to our online operations and (4) higher levels of expenses incurred in connection with our strategic initiatives, partially offset by (5) payroll, incentive compensation and benefits expense savings realized in connection with Organizing for Growth and other efficiency initiatives and (6) higher income from our credit card program.

Liquidity and Capital Resources
 
Our liquidity requirements consist principally of:

•
the funding of our merchandise purchases;
•
operating expense requirements;
•
debt service requirements;
•
capital expenditures for expansion and growth strategies, including new store construction, store remodels and upgrades of our management information systems;
•
income tax payments; and
•
obligations related to our defined benefit pension plan ("Pension Plan").

42

 
Our primary sources of short-term liquidity are comprised of cash on hand, availability under the Asset-Based Revolving Credit Facility and vendor payment terms.  The amounts of cash on hand and borrowings under the Asset-Based Revolving Credit Facility are influenced by a number of factors, including revenues, working capital levels, vendor terms, the level of capital expenditures, cash requirements related to financing instruments and debt service obligations, Pension Plan funding obligations and tax payment obligations, among others.
 
Our working capital requirements fluctuate during the fiscal year, increasing substantially during the first and second quarters of each fiscal year as a result of higher seasonal levels of inventories.  We have typically financed our cash requirements with available cash balances, cash flows from operations and, if necessary, with cash provided from borrowings under the Asset-Based Revolving Credit Facility.  We had $265.0 million of outstanding borrowings under the Asset-Based Revolving Credit Facility as of April 30, 2016 compared to $150.0 million as of May 2, 2015.
 
We believe that operating cash flows, cash balances and amounts available pursuant to the Asset-Based Revolving Credit Facility will be sufficient to fund our cash requirements through the end of fiscal year 2016, including merchandise purchases, anticipated capital expenditure requirements, debt service requirements, income tax payments and obligations related to our Pension Plan.
 
Net cash provided by our operating activities was $150.5 million in year-to-date fiscal 2016 compared to $122.8 million in year-to-date fiscal 2015. We held cash balances of $76.3 million at April 30, 2016 compared to $82.2 million at May 2, 2015.
 
Net cash used for investing activities was $232.9 million in year-to-date fiscal 2016 and $364.7 million in year-to-date fiscal 2015.  In year-to-date fiscal 2015, net cash used for investing activities included cash payments of $181.7 million incurred in connection with the MyTheresa acquisition. Capital expenditures were $232.0 million in year-to-date fiscal 2016 and $183.0 million in year-to-date fiscal 2015. Currently, we project capital expenditures for fiscal year 2016 to be approximately $312 to $322 million.  Net of developer contributions, capital expenditures for fiscal year 2016 are projected to be approximately $260 to $270 million.
 
Net cash provided by financing activities of $85.7 million in year-to-date fiscal 2016 was comprised primarily of net borrowings under our Asset-Based Revolving Credit Facility due to seasonal working capital requirements. Net cash provided by financing activities of $127.7 million in year-to-date fiscal 2015 was comprised primarily of borrowings under our Asset-Based Revolving Credit Facility to fund the MyTheresa acquisition and seasonal working capital requirements.

Subject to applicable restrictions in our credit agreements and indentures, we or our affiliates, at any time and from time to time, may purchase, redeem or otherwise retire our outstanding debt securities or term loans, including through open market or privately negotiated transactions with third parties or pursuant to one or more tender or exchange offers or otherwise, upon such terms and at such prices, as well as with such consideration, as we, or any of our affiliates, may determine.

Financing Structure at April 30, 2016
 
Our major sources of funds are comprised of the $900.0 million Asset-Based Revolving Credit Facility, the $2,876.4 million Senior Secured Term Loan Facility, $960.0 million Cash Pay Notes, $600.0 million PIK Toggle Notes, $125.0 million 2028 Debentures (each as described in more detail below), vendor payment terms and operating leases.
 
Asset-Based Revolving Credit Facility.  At April 30, 2016, the Asset-Based Revolving Credit Facility provided for a maximum committed borrowing capacity of $900.0 million.  The Asset-Based Revolving Credit Facility matures on October 25, 2018.  As of April 30, 2016, we had $265.0 million of borrowings outstanding under this facility, no outstanding letters of credit and $545.0 million of unused borrowing availability.
 
Availability under the Asset-Based Revolving Credit Facility is subject to a borrowing base.  The Asset-Based Revolving Credit Facility includes borrowing capacity available for letters of credit (up to $150.0 million, with any such issuance of letters of credit reducing the amount available under the Asset-Based Revolving Credit Facility on a dollar-for-dollar basis) and for borrowings on same-day notice.  The borrowing base is equal to at any time the sum of (a) 90% of the net orderly liquidation value of eligible inventory, net of certain reserves, plus (b) 90% of the amounts owed by credit card processors in respect of eligible credit card accounts constituting proceeds from the sale or disposition of inventory, less certain reserves, plus (c) 100% of segregated cash held in a restricted deposit account.  To the extent that excess availability is not equal to or greater than the greater of (a) 10% of the lesser of (1) the aggregate revolving commitments and (2) the borrowing base and (b) $50.0 million, we will be required to maintain a fixed charge coverage ratio.


43

The weighted average interest rate on the outstanding borrowings pursuant to the Asset-Based Revolving Credit Facility was 1.69% at April 30, 2016.
 
See Note 5 of the Notes to Condensed Consolidated Financial Statements in Part I — Item 1 for a further description of the terms of the Asset-Based Revolving Credit Facility.
 
Senior Secured Term Loan Facility.  At April 30, 2016, the outstanding balance under the Senior Secured Term Loan Facility was $2,876.4 million.  The principal amount of the loans outstanding is due and payable in full on October 25, 2020.
 
Depending on our senior secured first lien net leverage ratio (as defined in the credit agreement governing the Senior Secured Term Loan Facility), we could be required to prepay outstanding term loans from a certain portion of our annual excess cash flow (as defined in the credit agreement governing the Senior Secured Term Loan Facility).  Required excess cash flow payments commence at 50% of our annual excess cash flow (which percentage will be reduced to (a) 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 (b) 0% if our senior secured first lien net leverage ratio is equal to or less than 3.5 to 1.0).  We also must offer to prepay outstanding term loans at 100% of the principal amount to be prepaid, plus accrued and unpaid interest, with the proceeds of certain asset sales and debt issuances, subject to certain exceptions and reinvestment rights.

The interest rate on the outstanding borrowings pursuant to the Senior Secured Term Loan Facility was 4.25% at April 30, 2016.
 
See Note 5 of the Notes to Condensed Consolidated Financial Statements in Part I - Item 1 for a further description of the terms of the Senior Secured Term Loan Facility.
 
Cash Pay Notes.  We have outstanding $960.0 million aggregate principal amount of 8.00% Senior Cash Pay Notes due 2021. The Cash Pay Notes mature on October 15, 2021.

See Note 5 of the Notes to Condensed Consolidated Financial Statements in Part I - Item 1 for a further description of the terms of the Cash Pay Notes.

PIK Toggle Notes.  We have outstanding $600.0 million aggregate principal amount of 8.75%/9.50% Senior PIK Toggle Notes due 2021. The PIK Toggle Notes mature on October 15, 2021. With respect to any semi-annual interest period, we may currently elect to pay the applicable interest payment (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, subject to certain restrictions on the timing and number of elections of PIK Interest or partial PIK Interest payments.

See Note 5 of the Notes to Condensed Consolidated Financial Statements in Part I - Item 1 for a further description of the terms of the PIK Toggle Notes.

2028 Debentures.  We have outstanding $125.0 million aggregate principal amount of 7.125% Senior Debentures due 2028.  The 2028 Debentures mature on June 1, 2028.

See Note 5 of the Notes to Condensed Consolidated Financial Statements in Part I - Item 1 for a further description of the terms of the 2028 Debentures.

Interest rate caps.  At April 30, 2016, we had outstanding floating rate debt obligations of $3,141.4 million.  We have entered into interest rate cap agreements which effectively cap LIBOR related to our Senior Secured Term Loan Facility at 3.00% for an aggregate notional amount of $1,400.0 million from December 2014 through December 2016 to hedge the variability of our cash flows related to a portion of our floating rate indebtedness.  In the event LIBOR is less than the capped rate, we will pay interest at the lower LIBOR rate.  In the event LIBOR is higher than the capped rate, we will pay interest at the capped rate.

Interest rate swaps. In April 2016, we entered into floating to fixed interest rate swap agreements for an aggregate notional amount of $700.0 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 beginning in December 2016 and through the expiration of the agreements in October 2020. As a result of the swap agreements, our effective interest rate as to the $700.0 million in floating rate indebtedness will be fixed at 4.912% per month from December 2016 through October 2020. The interest rate swap agreements expire in October 2020.

44

Critical Accounting Policies
 
The preparation of Condensed Consolidated Financial Statements in conformity with GAAP requires us to make estimates and assumptions about future events.  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.  Our current estimates 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 we used in preparing the accompanying Condensed Consolidated Financial Statements.

A complete description of our critical accounting policies is included in our Annual Report on Form 10-K for the fiscal year ended August 1, 2015.
 
Recent Accounting Pronouncements. In May 2014, the Financial Accounting Standards Board (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 the most recent revenue recognition guidance. This new guidance is effective for us no earlier than the first quarter of fiscal year 2019 using one of two retrospective application methods.

In April 2015, the FASB issued guidance to simplify the balance sheet presentation of debt issuance costs. The standard requires that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying value of the associated debt, consistent with the presentation of debt discounts or premiums. The recognition and measurement guidance for debt issuance costs are not affected by the new guidance. In addition, the FASB issued guidance in August 2015 to clarify the treatment of debt issuance costs related to line of credit arrangements. Companies can continue to present debt issuance costs for line of credit arrangements as an asset and subsequently amortize the deferred issuance cost ratably over the term of the arrangement. This new guidance is effective for us as of the first quarter of fiscal year 2017.

In April 2015, the FASB issued guidance related to the accounting for cloud computing arrangements. Under this guidance, if a cloud computing arrangement includes a software license, the software license element should be accounted for in a manner consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the arrangement should be accounted for as a service contract. This new guidance is effective for us as of the first quarter of fiscal year 2017.

In November 2015, the FASB issued guidance to simplify the balance sheet presentation of deferred income taxes. The standard requires that deferred tax liabilities and assets be classified as non-current in a balance sheet. This new guidance is effective for us as of the first quarter of fiscal year 2018 using either a prospective or retrospective application method.

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 to not 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 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 March 2016, 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. This new guidance is effective for us as of the first quarter of fiscal year 2018.

With respect to each of the recent accounting pronouncements described above, we are currently evaluating which application methods to adopt and the impact of adopting these new accounting standards on our Condensed Consolidated Financial Statements. In addition, we do not expect that any other recently issued accounting pronouncements will have a material impact on our Condensed Consolidated Financial Statements.



45

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
We discussed our market risk in Part II — Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the fiscal year ended August 1, 2015 as filed with the Securities and Exchange Commission on September 22, 2015.  There have been no material changes to this risk since that time.
 

ITEM 4.  CONTROLS AND PROCEDURES
 
a. Disclosure Controls and Procedures.
 
In accordance with Exchange Act Rules 13a-15 and 15d-15, we carried out an evaluation as of April 30, 2016, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, as well as other key members of our management, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) under the Exchange Act).  Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, accumulated, processed, summarized, reported and communicated on a timely basis and within the time periods specified in the Securities and Exchange Commission’s rules and forms.

b. Changes in Internal Control over Financial Reporting.
 
In the ordinary course of business, we routinely enhance our information systems by either upgrading our current systems or implementing new systems.  No change occurred in our internal controls over financial reporting during the quarter ended April 30, 2016 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.


PART II


ITEM 1.  LEGAL PROCEEDINGS
 
The information contained under the subheadings "Employment and Consumer Class Actions Litigation" and “Cyber-Attack Class Actions Litigation” in Note 9 of the Notes to Condensed Consolidated Financial Statements in Part I - Item 1 is incorporated herein by reference as if fully restated herein.  Note 9 contains forward-looking statements that are subject to the risks and uncertainties discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Forward-Looking Statements.”
 

ITEM 1A.  RISK FACTORS
 
There have been no material changes to the risk factors described in Part I — Item 1A “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended August 1, 2015 as filed with the Securities and Exchange Commission on September 22, 2015. These risks are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition and/or results of operations.


ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
None.
 

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES
 
None.
 

46

ITEM 4.  MINE SAFETY DISCLOSURES
 
Not applicable.
 

ITEM 5.  OTHER INFORMATION
 
Not applicable.


ITEM 6.  EXHIBITS
Exhibit
 
 
Method of Filing
3.1
Certificate of Formation of the Company, dated as of October 28, 2013.
 
Incorporated herein by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended November 2, 2013.
 
 
 
 
3.2
Amended and Restated Limited Liability Company Agreement of the Company, dated as of October 28, 2013.
 
Incorporated herein by reference to the Company's Current Report on Form 8-K filed on October 29, 2013.
 
 
 
 
31.1
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
Filed herewith.
 
 
 
 
31.2
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
Filed herewith.
 
 
 
 
32.1
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002.
 
Furnished herewith.
 
 
 
 
101.INS
XBRL Instance Document
 
Filed herewith electronically.
 
 
 
 
101.SCH
XBRL Taxonomy Extension Schema Document
 
Filed herewith electronically.
 
 
 
 
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
 
Filed herewith electronically.
 
 
 
 
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
 
Filed herewith electronically.
 
 
 
 
101.LAB
XBRL Taxonomy Extension Labels Linkbase Document
 
Filed herewith electronically.
 
 
 
 
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
 
Filed herewith electronically.

47

SIGNATURE
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
 
NEIMAN MARCUS GROUP LTD LLC
(Registrant) 
Signature
 
Title
 
Date
 
 
 
 
 
/s/ T. Dale Stapleton
 
Senior Vice President
 
June 14, 2016
T. Dale Stapleton
 
and Chief Accounting Officer
 
 
 
 
(on behalf of the registrant and
 
 
 
 
as principal accounting officer)
 
 


48