10-Q 1 a08-7012_110q.htm QUARTERLY REPORT PURSUANT TO SECTIONS 13 OR 15(D)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

x

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

For the Quarterly Period Ended January 26, 2008

 

OR

 

o

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

Commission file no. 333-133184-12

 

Neiman Marcus, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware
(State or other jurisdiction of
incorporation or organization)

 

20-3509435
(I.R.S. Employer
Identification No.)

 

 

 

1618 Main Street
Dallas, Texas
(Address of principal executive offices)

 

75201
(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 x  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 definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o

 

Accelerated filer o

 

Non-accelerated filer o

 

Smaller reporting filer x

 

 

 

 

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

 

 

 

 

 

 

 

There were 1,012,919 shares of the registrant’s common stock, par value $.01 per share, outstanding at January 26, 2008.

 

 



 

NEIMAN MARCUS, INC.

 

 

INDEX

 

 

 

 

Part I.

Financial Information

Page

 

 

 

 Item 1.

Condensed Consolidated Balance Sheets as of January 26, 2008, July 28, 2007 and January 27, 2007

 

 

 

1

 

 

 

 

Condensed Consolidated Statements of Earnings for the Thirteen Weeks Ended

 

 

January 26, 2008 and Thirteen Weeks Ended January 27, 2007

2

 

 

 

 

Condensed Consolidated Statements of Earnings for the Twenty-Six Weeks Ended

 

 

January 26, 2008 and Twenty-Six Weeks Ended January 27, 2007

3

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Twenty-Six Weeks Ended

 

 

January 26, 2008 and Twenty-Six Weeks Ended January 27, 2007

4

 

 

 

 

Notes to Condensed Consolidated Financial Statements

5

 

 

 

 Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

 

32

 

 

 

 Item 3.

Quantitative and Qualitative Disclosures About Market Risk

49

 

 

 

 Item 4.

Controls and Procedures

49

 

 

 

Part II.

Other Information

 

 

 

 

 Item 1.

Legal Proceedings

50

 

 

 

 Item 1A.

Risk Factors

50

 

 

 

 Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

56

 

 

 

 Item 4.

Submission of Matters to a Vote of Security Holders

57

 

 

 

 Item 6.

Exhibits

57

 

 

 

Signatures

 

61

 


 


 

NEIMAN MARCUS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

(in thousands, except shares)

 

January 26,
2008

 

July 28,
2007

 

January 27,
2007

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

235,747

 

$

141,207

 

$

188,547

 

Merchandise inventories

 

885,210

 

918,269

 

812,291

 

Deferred income taxes

 

39,728

 

39,728

 

42,197

 

Other current assets

 

135,306

 

115,765

 

128,047

 

Total current assets

 

1,295,991

 

1,214,969

 

1,171,082

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

1,064,734

 

1,043,711

 

1,035,014

 

Goodwill and intangible assets, net

 

4,113,202

 

4,140,019

 

4,187,693

 

Debt issuance costs

 

77,735

 

84,844

 

91,262

 

Other assets

 

14,161

 

17,456

 

24,102

 

Total assets

 

$

6,565,823

 

$

6,500,999

 

$

6,509,153

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

281,165

 

$

361,299

 

$

300,485

 

Accrued liabilities

 

409,393

 

403,162

 

426,985

 

Other current liabilities

 

2,946

 

3,426

 

3,425

 

Total current liabilities

 

693,504

 

767,887

 

730,895

 

 

 

 

 

 

 

 

 

Long-term liabilities:

 

 

 

 

 

 

 

Long-term debt

 

2,946,004

 

2,945,906

 

3,020,809

 

Deferred income taxes

 

962,712

 

1,002,982

 

1,033,067

 

Deferred real estate credits, net

 

75,381

 

54,068

 

32,196

 

Other long-term liabilities

 

240,388

 

172,144

 

197,573

 

Total long-term liabilities

 

4,224,485

 

4,175,100

 

4,283,645

 

 

 

 

 

 

 

 

 

Common stock (par value $0.01 per share, 1,012,919 shares issued at January 26, 2008, 1,012,919 shares issued at July 28, 2007 and 1,012,341 shares issued at January 27, 2007)

 

10

 

10

 

10

 

Additional paid-in capital

 

1,415,397

 

1,412,386

 

1,408,373

 

Accumulated other comprehensive (loss) income

 

(15,021

)

21,229

 

5,523

 

Retained earnings

 

247,448

 

124,387

 

80,707

 

Total shareholders’ equity

 

1,647,834

 

1,558,012

 

1,494,613

 

Total liabilities and shareholders’ equity

 

$

6,565,823

 

$

6,500,999

 

$

6,509,153

 

 

See Notes to Condensed Consolidated Financial Statements.

 

1



 

NEIMAN MARCUS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(UNAUDITED)

 

(in thousands)

 

Thirteen
weeks ended
January 26,
2008

 

Thirteen
weeks ended
January 27,
2007

 

 

 

 

 

 

 

Revenues

 

$

1,373,855

 

$

1,295,836

 

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

 

913,234

 

850,258

 

Selling, general and administrative expenses (excluding depreciation)

 

292,572

 

283,581

 

Income from credit card program

 

(19,269

)

(17,930

)

Depreciation expense

 

35,086

 

34,073

 

Amortization of customer lists

 

13,568

 

13,581

 

Amortization of favorable lease commitments

 

4,385

 

4,469

 

 

 

 

 

 

 

Operating earnings

 

134,279

 

127,804

 

 

 

 

 

 

 

Interest expense, net

 

60,397

 

65,537

 

 

 

 

 

 

 

Earnings from continuing operations before income taxes

 

73,882

 

62,267

 

 

 

 

 

 

 

Income taxes

 

29,579

 

24,089

 

 

 

 

 

 

 

Earnings from continuing operations

 

44,303

 

38,178

 

 

 

 

 

 

 

Earnings from discontinued operations, net of taxes

 

 

2,845

 

 

 

 

 

 

 

Net earnings

 

$

44,303

 

$

41,023

 

 

See Notes to Condensed Consolidated Financial Statements.

 

2



 

NEIMAN MARCUS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(UNAUDITED)

 

(in thousands)

 

Twenty-Six
weeks ended
January 26,
2008

 

Twenty-Six
weeks ended
January 27,
2007

 

 

 

 

 

 

 

Revenues

 

$

2,506,098

 

$

2,335,048

 

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

 

1,580,370

 

1,457,037

 

Selling, general and administrative expenses (excluding depreciation)

 

564,548

 

531,113

 

Income from credit card program

 

(36,563

)

(34,301

)

Depreciation expense

 

70,221

 

67,249

 

Amortization of customer lists

 

27,179

 

27,143

 

Amortization of favorable lease commitments

 

8,770

 

8,939

 

Other income

 

(32,450

)

(4,210

)

 

 

 

 

 

 

Operating earnings

 

324,023

 

282,078

 

 

 

 

 

 

 

Interest expense, net

 

121,620

 

134,354

 

 

 

 

 

 

 

Earnings from continuing operations before income taxes

 

202,403

 

147,724

 

 

 

 

 

 

 

Income taxes

 

79,342

 

58,091

 

 

 

 

 

 

 

Earnings from continuing operations

 

123,061

 

89,633

 

 

 

 

 

 

 

Loss from discontinued operations, net of taxes

 

 

(21,381

)

 

 

 

 

 

 

Net earnings

 

$

123,061

 

$

68,252

 

 

See Notes to Condensed Consolidated Financial Statements.

 

3



 

NEIMAN MARCUS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

(in thousands)

 

Twenty-Six
weeks ended
January 26,
2008

 

Twenty-Six
weeks ended
January 27,
2007

 

 

 

 

 

 

 

CASH FLOWS - OPERATING ACTIVITIES

 

 

 

 

 

Net earnings

 

$

123,061

 

$

68,252

 

Loss from discontinued operations

 

 

21,381

 

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

 

 

 

 

 

Depreciation expense

 

70,221

 

67,249

 

Amortization of debt issue costs

 

7,109

 

7,033

 

Amortization of customer lists and favorable lease commitments

 

35,949

 

36,082

 

Gain on curtailment of defined benefit retirement obligations

 

(32,450

)

 

Deferred income taxes

 

(13,673

)

(24,147

)

Other, primarily costs related to defined benefit pension plans

 

14,568

 

12,986

 

 

 

204,785

 

188,836

 

Changes in operating assets and liabilities:

 

 

 

 

 

Decrease (increase) in merchandise inventories

 

33,059

 

(18,670

)

Increase in other current assets

 

(19,541

)

(32,640

)

(Increase) decrease in other assets

 

(5,616

)

365

 

(Decrease) increase in accounts payable and accrued liabilities

 

(51,276

)

23,100

 

Increase in deferred real estate credits

 

23,375

 

1,025

 

Net cash provided by operating activities – continuing operations

 

184,786

 

162,016

 

Net cash used for operating activities – discontinued operations

 

 

(9,163

)

Net cash provided by operating activities

 

184,786

 

152,853

 

CASH FLOWS – INVESTING ACTIVITIES

 

 

 

 

 

Capital expenditures

 

(88,173

)

(70,682

)

Purchases of short-term investments

 

(10,000

)

 

Sales of short-term investments

 

10,000

 

 

Payment to minority interest holder in Kate Spade

 

 

(59,400

)

Net proceeds from sale of Kate Spade

 

 

121,469

 

Net cash used for investing activities – continuing operations

 

(88,173

)

(8,613

)

Net cash used for investing activities – discontinued operations

 

 

(128

)

Net cash used for investing activities

 

(88,173

)

(8,741

)

CASH FLOWS – FINANCING ACTIVITIES

 

 

 

 

 

Repayment of borrowings

 

(2,073

)

(3,045

)

Repayment of borrowings under senior term loan facility

 

 

(175,000

)

Debt issuance costs paid

 

 

(758

)

Proceeds from purchase of common stock

 

 

150

 

Net cash used for financing activities – continuing operations

 

(2,073

)

(178,653

)

Net cash used for financing activities – discontinued operations

 

 

(1,675

)

Net cash used for financing activities

 

(2,073

)

(180,328

)

CASH AND CASH EQUIVALENTS

 

 

 

 

 

Increase (decrease) during the period

 

94,540

 

(36,216

)

Beginning balance

 

141,207

 

224,763

 

Ending balance - continuing operations

 

$

235,747

 

$

188,547

 

 

 

 

 

 

 

Supplemental Schedule of Cash Flow Information

 

 

 

 

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest

 

$

122,992

 

$

137,029

 

Income taxes

 

$

89,796

 

$

83,066

 

Noncash activities:

 

 

 

 

 

Additions to property and equipment

 

$

 

$

822

 

Increase to goodwill upon adoption of accounting standard

 

$

9,133

 

$

 

 

See Notes to Condensed Consolidated Financial Statements.

 

4



 

NEIMAN MARCUS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

1.              Basis of Presentation

 

We have prepared the accompanying unaudited condensed consolidated financial statements in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, these financial statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. Therefore, these financial statements should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended July 28, 2007.

 

In our opinion, the accompanying unaudited 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 specialty retail industry is seasonal in nature, with a higher level of sales typically generated in the fall and holiday selling seasons.  Due to seasonal and other factors, the results of operations for the second quarter of fiscal year 2008 are not necessarily comparable to, or indicative of, results of any other interim period or for the fiscal year as a whole.

 

Neiman Marcus, Inc. (the Company) is a wholly-owned subsidiary of and is controlled by Newton Holding, LLC (Holding).  Holding is controlled by investment funds affiliated with TPG Capital and Warburg Pincus (collectively, the Sponsors).  The Company was formed by Holding for the purpose of acquiring The Neiman Marcus Group, Inc. (NMG), which acquisition was completed on October 6, 2005 (the Acquisition).  Prior to the Acquisition, the Company had no independent assets or operations. After the Acquisition, the Company represents the successor to NMG since the Company’s sole asset is its investment in NMG and its operations consist solely of the operating activities of NMG as well as costs incurred by the Company related to its investment in NMG.

 

  Our fiscal year ends on the Saturday closest to July 31.  All references to the second quarter of fiscal year 2008 relate to the thirteen weeks ended January 26, 2008.  All references to the second quarter of fiscal year 2007 relate to the thirteen weeks ended January 27, 2007.  All references to year-to-date fiscal 2008 relate to the twenty-six weeks ended January 26, 2008.  All references to year-to-date fiscal 2007 relate to the twenty-six weeks ended January 27, 2007.

 

A detailed description of our critical accounting policies is included in our Annual Report on Form 10-K for the fiscal year ended July 28, 2007.

 

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

 

Use of Estimates.  We are required to make estimates and assumptions about future events in preparing financial statements in conformity with generally accepted accounting principles.  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 unaudited condensed consolidated financial statements.  While we believe that our past estimates and assumptions have been materially accurate, our current estimates are subject to change if different assumptions as to the outcome of future events were made. We evaluate our estimates and judgments on an ongoing basis and predicate those estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances.  We make adjustments to our assumptions and judgments when facts and circumstances dictate.  Since future events and their effects cannot be determined with absolute certainty, actual results may differ from the estimates used in preparing the accompanying unaudited condensed consolidated financial statements.

 

  We believe the following critical accounting policies, among others, encompass the more significant judgments and estimates used in the preparation of our financial statements:

 

·                  Recognition of revenues;

 

·                  Valuation of merchandise inventories, including determination of original retail values, recognition of markdowns and vendor allowances, estimation of inventory shrinkage, and determination of cost of goods sold;

 

·                  Determination of impairment of long-lived assets;

 

·      Recognition of advertising and catalog costs;

 

5



 

·      Measurement of liabilities related to our loyalty programs;

 

·      Recognition of income taxes; and

 

·                  Measurement of accruals for general liability, workers’ compensation and health insurance claims and pension and postretirement health care benefits.

 

  Recent Accounting Pronouncements.  In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (SFAS 157), which provides guidance for using fair value to measure certain assets and liabilities.  SFAS 157 will apply whenever another standard requires or permits assets or liabilities to be measured at fair value.  The standard does not expand the use of fair value to any new circumstances.  SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, or our fiscal year ending August 1, 2009.  We have not yet evaluated the impact, if any, of adopting SFAS 157 on our consolidated financial statements.

 

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (SFAS 159).  SFAS 159 expands opportunities to use fair value measurement in financial reporting and permits entities to choose to measure many financial instruments and certain other items at fair value.  This Statement is effective for fiscal years beginning after November 15, 2007, or our fiscal year ending August 1, 2009.  We have not yet evaluated the impact, if any, of adopting SFAS 159 on our consolidated financial statements.

 

2.              Discontinued Operations

 

In February 1999, NMG acquired a 56% controlling interest in Kate Spade LLC, a designer and marketer of high—end accessories.  In April 2005, the minority investor in Kate Spade LLC exercised the put option with respect to the sale of the full amount of its 44% stake in such company to NMG. In October 2006, we entered into an agreement to settle the put option whereby we purchased the interest held by the minority investor for approximately $59.4 million.

 

In November 2006, we entered into a definitive agreement to sell 100% of the ownership interests in Kate Spade LLC to Liz Claiborne, Inc. (consisting of both our original 56% interest and the 44% minority interest subsequently purchased by NMG) for pretax net cash proceeds of approximately $121.5 million. Both the purchase of the minority interest in Kate Spade LLC and the sale of Kate Spade LLC to Liz Claiborne, Inc. were consummated in December 2006.

 

The Company’s unaudited condensed consolidated financial statements, accompanying notes and other information provided in this Quarterly Report on Form 10-Q reflect Kate Spade LLC as discontinued operations for all periods presented.

 

Summarized financial information with respect to the results of operations of Kate Spade LLC is as follows:

 

(in thousands)

 

Thirteen
weeks ended
January 27,
2007

 

Twenty-Six
weeks ended
January 27,
2007

 

 

 

 

 

 

 

Revenues

 

$

10,704

 

$

29,612

 

 

 

 

 

 

 

Earnings from discontinued operations before income taxes

 

$

2,345

 

$

3,494

 

Income taxes

 

1,289

 

1,967

 

Net earnings from discontinued operations

 

1,056

 

1,527

 

 

 

 

 

 

 

Gain (loss) on disposition before income taxes

 

3,467

 

(12,008

)

Income taxes

 

(1,678

)

(10,900

)

Net earnings (loss) on disposition

 

1,789

 

(22,908

)

 

 

 

 

 

 

Earnings (loss) from discontinued operations, net of taxes

 

$

2,845

 

$

(21,381

)

 

In the first quarter of fiscal year 2007, we impaired the intangible assets of Kate Spade LLC by $12.5 million in order to state the net assets of Kate Spade LLC at their estimated net realizable value to NMG.

 

6



 

3.              Goodwill and Intangible Assets, Net

 

(in thousands)

 

January 26,
2008

 

July 28,
2007

 

January 27,
2007

 

 

 

 

 

 

 

 

 

Goodwill

 

$

1,614,273

 

$

1,605,140

 

$

1,605,140

 

Tradenames

 

1,610,315

 

1,610,315

 

1,621,788

 

Customer lists, net

 

450,065

 

477,245

 

504,507

 

Favorable lease commitments, net

 

438,549

 

447,319

 

456,258

 

Goodwill and intangible assets, net

 

$

4,113,202

 

$

4,140,019

 

$

4,187,693

 

 

In the first quarter of fiscal year 2008, the cumulative effect of adopting FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48) resulted in a net increase to our accruals for uncertain tax positions of $9.1 million for the derecognition of certain tax benefits.  This increase to our accruals was offset by a corresponding increase to goodwill as these uncertainties existed at the time of the Acquisition.

 

Goodwill and indefinite-lived intangible assets, such as tradenames, are not subject to amortization. Rather, recoverability of goodwill and indefinite-lived intangible assets is assessed annually and upon the occurrence of certain events. The recoverability assessment requires us to make judgments and estimates regarding fair values. Fair values are determined using estimated future cash flows, including growth assumptions for future revenues, gross margin rates and other estimates. To the extent that our estimates are not realized, future assessments could result in impairment charges. In the fourth quarter of fiscal year 2007, we recorded a $11.5 million pretax impairment charge related to the writedown to fair value in the net carrying value of the Horchow tradename based upon lower anticipated future revenues associated with the brand.

 

Customer lists are amortized using the straight-line method over their estimated useful lives, ranging from 5 to 24 years (weighted average life of 13 years).  Favorable lease commitments are amortized straight-line over the remaining lives of the leases, ranging from 6 to 49 years (weighted average life of 33 years).  Total estimated amortization of all acquisition-related intangible assets is currently estimated as follows (in thousands):

 

2008

 

$

72,278

 

2009

 

72,278

 

2010

 

72,278

 

2011

 

61,567

 

2012

 

48,922

 

2013

 

46,745

 

 

4.              Long-term Debt

 

The significant components of our long-term debt are as follows:

 

(in thousands)

 

Interest
Rate

 

January 26,
2008

 

July 28,
2007

 

January 27,
2007

 

 

 

 

 

 

 

 

 

 

 

Senior Secured Term Loan Facility

 

variable

 

$1,625,000

 

$1,625,000

 

$1,700,000

 

2028 Debentures

 

7.125%

 

121,004

 

120,906

 

120,809

 

Senior Notes

 

9.0%/9.75%

 

700,000

 

700,000

 

700,000

 

Senior Subordinated Notes

 

10.375%

 

500,000

 

500,000

 

500,000

 

Long-term debt

 

 

 

$2,946,004

 

$2,945,906

 

$3,020,809

 

 

Senior Secured Asset-Based Revolving Credit Facility.  NMG’s senior secured Asset-Based Revolving Credit Facility provides financing of up to $600.0 million, subject to a borrowing base equal to at any time the lesser of 80% of eligible inventory (valued at the lower of cost or market value) and 85% of net orderly liquidation value of the eligible inventory, less certain reserves.

  The Asset-Based Revolving Credit Facility provides that NMG has the right at any time to request up to $200.0 million of additional commitments, but the lenders are under no obligation to provide any such additional commitments, and any increase in commitments will be subject to customary conditions precedent. NMG’s ability to borrow under any increased commitments would still be limited by the amount of the borrowing base.

 

7



 

As of January 26, 2008, NMG had $576.1 million of unused borrowing availability under the Asset-Based Revolving Credit Facility based on a borrowing base of over $600.0 million and after giving effect to $23.9 million used for letters of credit.  The principal amount of the loans outstanding is due and payable in full on October 6, 2010.

 

  Borrowings under the Asset-Based Revolving Credit Facility bear interest at a rate per annum equal to, at NMG’s option, either (a) a base rate determined by reference to the higher of (1) the prime rate of Deutsche Bank Trust Company Americas and (2) the federal funds effective rate plus 1/2 of 1% or (b) a LIBOR rate, subject to certain adjustments, in each case plus an applicable margin. The initial applicable margin is 0% with respect to base rate borrowings and 1.75% with respect to LIBOR borrowings, in each case subject to adjustment based on the historical availability under the Asset-Based Revolving Credit Facility. In addition, NMG is required to pay a commitment fee of 0.375% per annum in respect of the unutilized commitments, subject to downward adjustment if the average revolving loan utilization is 50% or more for any applicable period. NMG must also pay customary letter of credit fees and agency fees.

 

  All obligations under the Asset-Based Revolving Credit Facility are guaranteed by the Company and certain of NMG’s existing and future domestic subsidiaries (subsidiary guarantors). As of January 26, 2008, the liabilities of NMG’s non-guarantor subsidiaries totaled approximately $4.4 million, or 0.1% of consolidated liabilities, and the assets of NMG’s non-guarantor subsidiaries aggregated approximately $6.3 million, or 0.1% of consolidated total assets. All obligations under NMG’s 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 the Company, NMG and the subsidiary guarantors.

 

The Asset-Based Revolving Credit Facility contains a number of customary negative covenants and restrictions, but does not require NMG to comply with any financial ratio maintenance covenants.  For a more detailed description of NMG’s Asset-Based Revolving Credit Facility, refer to our Annual Report on Form 10-K for the fiscal year ended July 28, 2007.

 

Senior Secured Term Loan Facility.  In October 2005, NMG entered into a credit agreement and related security and other agreements for a $1,975.0 million Senior Secured Term Loan Facility.  NMG voluntarily repaid $100.0 million principal amount of the loans under its Senior Secured Term Loan Facility in fiscal year 2006 and $250 million in fiscal year 2007.

 

  At January 26, 2008, borrowings under the Senior Secured Term Loan Facility bore interest at a rate per annum equal to, at NMG’s option, either (a) a base rate determined by reference to the higher of (1) the prime rate of Credit Suisse and (2) the federal funds effective rate plus 1/2 of 1% or (b) a LIBOR rate, subject to certain adjustments, in each case plus an applicable margin. At January 26, 2008, the applicable margin with respect to base rate borrowings was 0.75% and the applicable margin with respect to LIBOR borrowings was 1.75%. The interest rate on the outstanding borrowings pursuant to the Senior Secured Term Loan Facility was 6.69% at January 26, 2008.

 

  The credit agreement governing the Senior Secured Term Loan Facility requires NMG to prepay outstanding term loans with 50% (which percentage will be reduced to 25% if NMG’s total leverage ratio is less than a specified ratio and will be reduced to 0% if NMG’s total leverage ratio is less than a specified ratio) of its annual excess cash flow (as defined in the credit agreement). For fiscal year 2007, NMG was not required to prepay any outstanding term loans pursuant to the annual excess cash flow requirements.  If a change of control (as defined in the credit agreement) occurs, NMG will be required to offer to prepay all outstanding term loans, at a prepayment price equal to 101% of the principal amount to be prepaid, plus accrued and unpaid interest to the date of prepayment. NMG 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 under certain circumstances.

 

  NMG may voluntarily prepay outstanding loans under the Senior Secured Term Loan Facility at any time without premium or penalty other than customary “breakage” costs with respect to LIBOR loans. There is no scheduled amortization under the Senior Secured Term Loan Facility. The principal amount of the loans outstanding is due and payable in full on April 6, 2013.

 

All obligations under the Senior Secured Term Loan Facility are unconditionally guaranteed by the Company and each direct and indirect domestic subsidiary of NMG that guarantees the obligations of NMG under its Asset-Based Revolving Credit Facility. All obligations under the Senior Secured Term Loan Facility, and the guarantees of those obligations, are secured, subject to certain significant exceptions, by substantially all of the assets of the Company, NMG and the subsidiary guarantors.

 

The credit agreement governing the Senior Secured Term Loan Facility contains a number of customary negative covenants and additional 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.  For a more detailed description of the Senior Secured Term Loan Facility, refer to our Annual Report on Form 10-K for the fiscal year ended July 28, 2007.

 

8



 

2028 Debentures.  In May 1998, NMG issued $125.0 million aggregate principal amount of its 7.125% 2028 Debentures. NMG equally and ratably secures its 2028 Debentures by a first lien security interest on certain collateral subject to liens granted under NMG’s Senior Secured Credit Facilities. The 2028 Debentures are guaranteed on an unsecured, senior basis by the Company. For a more detailed description of the 2028 Debentures, refer to our Annual Report on Form 10-K for the fiscal year ended July 28, 2007.

 

The fair value of the 2028 Debentures at January 26, 2008 was approximately $115.0 million.

 

Senior Notes.  NMG has $700.0 million aggregate original principal amount of 9.0% / 9.75% Senior Notes under a senior indenture (Senior Indenture).  NMG’s Senior Notes mature on October 15, 2015.

 

  For any interest payment period through October 15, 2010, NMG may, at its option, elect to pay interest on the Senior Notes entirely in cash (Cash Interest) or entirely by increasing the principal amount of the outstanding Senior Notes or by issuing additional Senior Notes (PIK Interest). Cash Interest on the Senior Notes accrues at the rate of 9% per annum. PIK Interest on the Senior Notes accrues at the rate of 9.75% per annum. To date, NMG has paid all interest obligations in cash. After October 15, 2010, NMG will make all interest payments on the Senior Notes entirely in cash. All Senior Notes mature on October 15, 2015. Interest on the Senior Notes is payable quarterly in arrears on each January 15, April 15, July 15 and October 15, commencing on January 15, 2006.

 

  The Senior Notes are fully and unconditionally guaranteed, on a joint and several unsecured, senior basis, by each of NMG’s wholly-owned domestic subsidiaries that guarantee NMG’s obligations under its Senior Secured Credit Facilities and by the Company. The Senior Notes and the guarantees thereof are NMG’s and the guarantors’ unsecured, senior obligations and rank (i) equal in the right of payment with all of NMG’s and the guarantors’ existing and future senior indebtedness, including any borrowings under NMG’s Senior Secured Credit Facilities and the guarantees thereof and NMG’s 2028 Debentures; and (ii) senior to all of NMG’s and its guarantors’ existing and future subordinated indebtedness, including the Senior Subordinated Notes due 2015 and the guarantees thereof. The Senior Notes also are effectively junior in priority to NMG’s and its guarantors’ obligations under all secured indebtedness, including NMG’s Senior Secured Credit Facilities, the 2028 Debentures, and any other secured obligations of NMG, in each case, to the extent of the value of the assets securing such obligations. In addition, the Senior Notes are structurally subordinated to all existing and future liabilities, including trade payables, of NMG’s subsidiaries that are not providing guarantees.

 

  NMG is not required to make any mandatory redemption or sinking fund payments with respect to the Senior Notes.  The indenture governing the Senior Notes contains a number of customary negative covenants and events of default.  For a more detailed description of NMG’s Senior Notes, refer to our Annual Report on Form 10-K for the fiscal year ended July 28, 2007.

 

  The fair value of NMG’s Senior Notes at January 26, 2008 was approximately $694.8 million.

 

Senior Subordinated Notes.  NMG has $500.0 million aggregate principal amount of 10.375% Senior Subordinated Notes under a senior subordinated indenture (Senior Subordinated Indenture). NMG’s Senior Subordinated Notes mature on October 15, 2015.

 

  The Senior Subordinated Notes are fully and unconditionally guaranteed, on a joint and several unsecured, senior subordinated basis, by each of NMG’s wholly-owned domestic subsidiaries that guarantee NMG’s obligations under its Senior Secured Credit Facilities and by the Company. The Senior Subordinated Notes and the guarantees thereof are NMG’s and the guarantors’ unsecured, senior subordinated obligations and rank (i) junior to all of NMG’s and the guarantors’ existing and future senior indebtedness, including the Senior Notes and any borrowings under NMG’s Senior Secured Credit Facilities, and the guarantees thereof and NMG’s 2028 Debentures; (ii) equally with any of NMG’s and the guarantors’ future senior subordinated indebtedness; and (iii) senior to any of NMG’s and the guarantors’ future subordinated indebtedness. In addition, the Senior Subordinated Notes are structurally subordinated to all existing and future liabilities, including trade payables, of NMG’s subsidiaries that are not providing guarantees.

 

NMG is not required to make any mandatory redemption or sinking fund payments with respect to the Senior Subordinated Notes. The indenture governing the Senior Subordinated Notes contains a number of customary negative covenants and events of defaults.  For a more detailed description of NMG’s Senior Subordinated Notes, refer to our Annual Report on Form 10-K for the fiscal year ended July 28, 2007.

 

The fair value of NMG’s Senior Subordinated Notes at January 26, 2008 was approximately $498.8 million.

 

9



 

  Maturities of Long-Term Debt.  At January 26, 2008, annual maturities of long-term debt during the next five fiscal years and thereafter are as follows (in millions):

 

2009

 

$

 

2010

 

 

2011

 

 

2012

 

 

2013

 

1,625.0

 

Thereafter

 

1,321.0

 

 

  The above table does not reflect future excess cash flow prepayments, if any, that may be required under the Senior Secured Term Loan Facility.

 

Interest Rate Swaps.  The Company uses derivative financial instruments to help manage its interest rate risk. Effective December 6, 2005, NMG entered into floating to fixed interest rate swap agreements for an aggregate notional amount of $1,000.0 million to limit its exposure to interest rate increases related to a portion of its floating rate indebtedness. The interest rate swap agreements terminate after five years.  At January 26, 2008, the fair value of NMG’s interest rate swap agreements was a loss of approximately $49.5 million, which amount is included in other long-term liabilities.

 

As of the effective date, NMG designated the interest rate swaps as cash flow hedges. As a result, changes in the fair value of NMG’s swaps are recorded as a component of other comprehensive income. At January 26, 2008, we have $31.1 million of unrecognized losses, net of tax, on our interest rate swap agreements included in other comprehensive income.

 

  As a result of the swap agreements, NMG’s effective fixed interest rates as to the $1,000.0 million in floating rate indebtedness will currently range from 6.508% to 6.733% per quarter through 2010 and result in an average fixed rate of 6.592%.

 

  Interest expense.  The significant components of interest expense are as follows:

 

 

 

Quarter-to-Date

 

Year-to-Date

 

(in thousands)

 

Thirteen
weeks
ended
January 26,
2008

 

Thirteen
weeks
ended
January 27,
2007

 

Twenty-Six
weeks
ended
January 26,
2008

 

Twenty-Six
weeks
ended
January 27,
2007

 

 

 

 

 

 

 

 

 

 

 

Senior Secured Term Loan Facility

 

$

27,806

 

$

33,068

 

$

55,782

 

$

68,771

 

2028 Debentures

 

2,181

 

2,236

 

4,365

 

4,462

 

Senior Notes

 

15,453

 

15,750

 

30,906

 

31,500

 

Senior Subordinated Notes

 

12,724

 

12,969

 

25,448

 

25,937

 

Amortization of debt issue costs

 

3,554

 

3,535

 

7,109

 

7,033

 

Other

 

842

 

941

 

1,674

 

1,980

 

Total interest expense

 

62,560

 

68,499

 

125,284

 

139,683

 

Less:

 

 

 

 

 

 

 

 

 

Interest income

 

1,433

 

2,109

 

2,288

 

3,751

 

Capitalized interest

 

730

 

853

 

1,376

 

1,578

 

Interest expense, net

 

$

60,397

 

$

65,537

 

$

121,620

 

$

134,354

 

 

10



 

5.              Employee Benefit Plans

 

Description of Benefit Plans.  We sponsor a defined benefit pension plan (Pension Plan) covering substantially all full-time employees. We also sponsor an unfunded supplemental executive retirement plan (SERP Plan) which provides certain employees additional pension benefits. Benefits under both plans are based on the employees’ years of service and compensation over defined periods of employment.

 

  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. The cost of these benefits is accrued during the years in which an employee provides services.

 

We have a qualified defined contribution 401(k) Plan.  Employees make contributions to the 401(k) Plan and we match an employee’s contribution up to a maximum of 6% of the employee’s compensation subject to statutory limitations.

 

Plan Redesign. On September 7, 2007, our Board of Directors approved certain changes to our long-term benefits program.  Effective January 1, 2008, we offered a new, enhanced retirement savings plan (RSP) subject to participants’ elections to participate (as more fully described below).  For associates participating in the RSP:

 

·                  Participants’ balances in our 401(k) Plan were automatically transferred to the RSP.

 

·                  Our matching contributions to the RSP increased to a potential maximum 75% of the employee contributions (up to a 6% deferral) from the potential maximum 50% to the 401(k) Plan (subject to IRS limit of $15,500 in 2008 for employee contributions).

 

·                  Our matching contributions vest to employees in two years as compared to the three year vesting under the 401(k) Plan.

 

·                  All current employees, who did not participate in the former 401(k) Plan, and future employees are automatically enrolled in the RSP at a salary deferral rate of 3% once eligibility requirements have been met.

 

Effective January 1, 2008, we also offered a new defined contribution supplemental executive retirement plan (Defined Contribution SERP Plan).

 

Concurrent with the implementation of the RSP and the new supplemental executive retirement plan, we froze benefits offered under our Pension and SERP Plans for most employees.  Employees with a minimum of ten years of service and whose ages plus years of service equaled at least 65 (“Rule of 65”) as of December 31, 2007 were allowed either 1) to continue participation in our 401(k) Plan and Pension Plan (and SERP Plan, if eligible) or 2) to freeze the benefits earned under the Pension Plan (and SERP Plan, if eligible) and participate in the RSP. No employee who met vesting requirements forfeited benefits earned prior to January 1, 2008.

 

In connection with the redesign of our long-term benefits program, we recorded a one-time pension curtailment gain of $32.5 million (recorded as other income in our condensed consolidated statements of earnings) in the first quarter of fiscal year 2008 to reflect the impact of freezing benefits provided under the Pension and SERP Plans as of December 31, 2007.

 

11



 

Costs of Benefits.  The components of the expenses incurred under our Pension Plan, SERP Plan and Postretirement Plan are as follows:

 

 

 

Quarter–to–Date

 

Year–to–Date

 

(in thousands)

 

Thirteen
weeks ended
January 26,
2008

 

Thirteen
weeks ended
January 27,
2007

 

Twenty-Six
weeks ended
January 26,
2008

 

Twenty-Six
weeks ended
January 27,
2007

 

Pension Plan:

 

 

 

 

 

 

 

 

 

Service cost

 

$

3,409

 

$

3,922

 

$

7,803

 

$

7,844

 

Interest cost

 

5,549

 

5,863

 

11,390

 

11,726

 

Expected return on plan assets

 

(6,019

)

(5,876

)

(12,178

)

(11,752

)

Net amortization of gains

 

188

 

 

 

 

Pension Plan expense

 

$

3,127

 

$

3,909

 

$

7,015

 

$

7,818

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Curtailment gain

 

$

 

$

 

$

26,113

 

$

 

 

 

 

 

 

 

 

 

 

 

SERP Plan:

 

 

 

 

 

 

 

 

 

Service cost

 

$

378

 

$

469

 

$

846

 

$

938

 

Interest cost

 

1,203

 

1,232

 

2,473

 

2,464

 

SERP Plan expense

 

$

1,581

 

$

1,701

 

$

3,319

 

$

3,402

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Curtailment gain

 

$

 

$

 

$

6,337

 

$

 

 

 

 

 

 

 

 

 

 

 

Defined Contribution SERP Plan

 

$

147

 

$

 

$

147

 

$

 

 

 

 

 

 

 

 

 

 

 

Postretirement Plan:

 

 

 

 

 

 

 

 

 

Service cost

 

$

31

 

$

14

 

$

62

 

$

28

 

Interest cost

 

339

 

227

 

678

 

454

 

Net amortization of losses

 

137

 

 

274

 

 

Postretirement Plan expense

 

$

507

 

$

241

 

$

1,014

 

$

482

 

 

Benefit Obligations.  Obligations for our employee benefit plans, included in other long-term liabilities, are as follows:

 

(in thousands)

 

January 26,
2008

 

July 28,
2007

 

January 27,
2007

 

 

 

 

 

 

 

 

 

Pension Plan

 

$

40,228

 

$

55,603

 

$

86,638

 

SERP Plan

 

81,177

 

86,146

 

82,897

 

Defined Contribution SERP Plan

 

147

 

 

 

Postretirement Plan

 

22,855

 

22,091

 

15,229

 

 

 

144,407

 

163,840

 

184,764

 

Less: current portion

 

(4,019

)

(4,019

)

 

Long-term portion of benefit obligations

 

$

140,388

 

$

159,821

 

$

184,764

 

 

We adopted the provisions of Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Benefit Plans” (SFAS 158), in the fourth quarter of fiscal year 2007.  In connection with the adoption of SFAS 158, we adjusted the carrying values of our previously recorded obligations to equal their unfunded status at July 28, 2007.  These aggregate adjustments resulted in a net decrease in the carrying values of our obligations by approximately $28.7 million, which amount was recorded (net of taxes of $11.3 million) as an increase in accumulated other comprehensive income in our statement of shareholders’ equity for fiscal year 2007.

 

In the first quarter of fiscal year 2008, we reduced our recorded liability for projected benefit obligations payable by the Pension Plan by $26.1 million and by the SERP Plan by $6.3 million to reflect the impact of freezing benefits provided under these plans as of December 31, 2007.

 

12



 

Funding Policy and Plan Assets.  Our policy is to fund the Pension Plan at or above the minimum required by law. Based upon currently available information, we will not be required to make contributions to the Pension Plan during fiscal year 2008. In fiscal year 2007, we made no contributions to our Pension Plan.

 

6.              Income Taxes

 

We adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48) in the first quarter of fiscal year 2008.  FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.

 

The cumulative effect of adopting FIN 48 resulted in a net increase to our accruals for uncertain tax positions of $9.1 million for the derecognition of certain tax benefits. This increase to our accruals was offset by a corresponding increase to goodwill as these uncertainties existed at the time of the Acquisition.  At adoption, the gross amount of unrecognized tax benefits was $26.7 million, of which $3.5 million of unrecognized tax benefits 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 $8.5 million upon adoption of FIN 48.

 

We file income tax returns in the U.S. federal jurisdiction and various state and local jurisdictions. We closed the Internal Revenue Service (IRS) examinations of federal tax returns for fiscal years 2004 and 2003 during the first quarter of fiscal year 2007 and paid the related tax liability during the second quarter of fiscal year 2007.   The IRS is now examining our federal tax returns for fiscal years 2005 and 2006.  We believe our recorded tax liabilities as of January 26, 2008 are sufficient to cover any potential assessments to be made by the IRS upon the completion of their examinations. We will continue to monitor the progress of the IRS examinations and review our recorded tax liabilities for potential audit assessments.  With respect to state and local jurisdictions, with limited exceptions, the Company and its subsidiaries are no longer subject to income tax audits for fiscal years before 2003.  We believe it is reasonably possible that a significant increase or decrease in the amounts of our unrecognized tax benefits could occur within the next 12 months as a result of negotiated settlements with tax authorities.  However, at this time, an estimate of the range of adjustment cannot be made.

 

13



 

7.              Stock-Based Compensation

 

The Company has approved equity-based management arrangements which authorize equity awards to be granted to certain management employees for up to 87,992.0 shares of the common stock of the Company.  Options generally vest over four to five years and expire 10 years from the date of grant.

 

A summary of the status of our stock option plan as of January 26, 2008, July 28, 2007 and January 27, 2007 and changes during the periods ended on these dates is as follows:

 

 

 

January 26, 2008

 

July 28, 2007

 

January 27, 2007

 

 

 

Shares

 

Weighted
Average
Exercise
Price

 

Shares

 

Weighted
Average
Exercise
Price

 

Shares

 

Weighted
Average
Exercise
Price

 

Outstanding at beginning of period

 

83,634.3

 

$

1,430

 

81,716.3

 

$

1,416

 

81,716.3

 

$

1,416

 

Granted

 

260.0

 

2,684

 

2,496.0

 

1,942

 

2,496.0

 

1,942

 

Exercised

 

 

 

(578.0

)

1,590

 

 

 

Outstanding at end of period

 

83,894.3

 

$

1,434

 

83,634.3

 

$

1,430

 

84,212.3

 

$

1,432

 

Options exercisable at end of period

 

40,653.1

 

$

1,385

 

29,764.1

 

$

1,233

 

24,533.7

 

$

1,179

 

 

The exercise price of approximately 50% of such options escalate at a 10% compound rate per year until the earlier to occur of (i) exercise, (ii) the fifth anniversary of the date of grant or (iii) the occurrence of a change in control. However, in the event the Sponsors cause the sale of shares of the Company to an unaffiliated entity, the exercise price will cease to accrete at the time of the sale with respect to a pro rata portion of the accreting options.

 

All grants of stock options have an exercise price equal to the fair market value of our common stock on the date of grant.  Because we are privately held and there is no public market for our common stock, the fair market value of our common stock is determined by our Compensation Committee at the time option grants are awarded.  In determining the fair value of our common stock, the Compensation Committee considers such factors as the Company's actual and projected financial results, the principal amount of the Company's indebtedness, valuations of the Company performed by third parties and other factors it believes are material to the valuation process.

 

We use the Black-Scholes option-pricing model to determine the fair value of our options as of the date of grant in accordance with the provisions of SFAS 123(R).  A summary of fiscal years 2008, 2007 and 2006 grants and fair value assumptions is as follows:

 

 

 

Fiscal Year 2008
Grants

 

Fiscal Year 2007
Grants

 

Fiscal Year 2006
Grants

 

 

 

Fair Value
Options

 

Accreting
Exercise
Price
Options

 

Fair Value
Options

 

Accreting
Exercise
Price
Options

 

Fair Value
Options

 

Accreting
Exercise
Price
Options

 

Options outstanding at January 26, 2008

 

130.0

 

130.0

 

1,248.0

 

1,248.0

 

43,594.6

 

37,543.7

 

Exercise price at January 26, 2008

 

$

2,684

 

$

2,684

 

$

1,942

 

$

2,136

 

$

1,445

 

$

1,749

 

Term

 

5

 

5

 

5

 

5

 

5

 

5

 

Volatility

 

30.0

%

30.0

%

30.0

%

30.0

%

29.7

%

29.7

%

Risk-Free Rate

 

3.5

%

3.5

%

4.5

%

4.5

%

4.2

%

4.2

%

Dividend Yield

 

 

 

 

 

 

 

Fair Value

 

$

882

 

$

433

 

$

676

 

$

341

 

$

494

 

$

247

 

 

Expected volatility is based on a combination of NMG’s historical volatility adjusted for our new leverage and estimates of implied volatility of our peer group.

 

We recognized non-cash stock compensation expense of $3.0 million for the twenty-six weeks ended January 26, 2008 and $2.9 million for the twenty-six weeks ended January 27, 2007, which is included in selling, general and administrative expenses. At January 28, 2006, unearned non-cash stock-based compensation that we expect to recognize as expense over the next 5 years aggregates approximately $16.0 million.

 

14



 

8.              Transactions with Sponsors

 

Pursuant to a management services agreement with affiliates of the Sponsors, and in exchange for on-going consulting and management advisory services that are provided to us by the Sponsors and their affiliates, affiliates of the Sponsors receive an aggregate annual management fee equal to the lesser of (i) 0.25% of our consolidated annual revenues or (ii) $10 million. Affiliates of the Sponsors also receive reimbursement for out-of-pocket expenses incurred by them or their affiliates in connection with services provided pursuant to the agreement. These management fees are payable quarterly in arrears.  We recorded management fees of $6.3 million during the twenty-six weeks ended January 26, 2008 and $5.9 million during the twenty-six weeks ended January 27, 2007, which are included in selling, general and administrative expenses in the condensed consolidated statements of earnings.

 

The management services agreement also provides that affiliates of the Sponsors may receive future fees in connection with certain subsequent financing and acquisition or disposition transactions. The management services agreement includes customary exculpation and indemnification provisions in favor of the Sponsors and their affiliates.

 

9.              Income from Credit Card Program

 

Pursuant to a long-term marketing and servicing alliance with HSBC, HSBC offers credit card and non-card payment plans bearing our brands and we receive ongoing payments from HSBC based on credit card sales and compensation for marketing and servicing activities (HSBC Program Income).  We recognize HSBC Program Income when earned.

 

On February 14, 2008, we filed a lawsuit against HSBC Bank Nevada, N.A. and HSBC Private Label Corporation (collectively, HSBC) alleging a breach by HSBC of our existing Credit Card Program Agreement (the Program Agreement) as well as other claims, and we asked for a temporary restraining order and other injunctive relief. Subsequent to the granting of the temporary restraining order by the Court, we have negotiated and executed a letter of intent with HSBC related to certain proposed amendments to the Program Agreement. These proposed amendments will, among other things, provide for 1) the allocation between HSBC and the Company of additional income, if any, to be generated from our credit card program as a result of certain changes made to the Program Agreement, and 2) the allocation of certain credit losses between HSBC and the Company. We expect to execute the proposed amendments in the third quarter of fiscal year 2008. We do not currently believe either the filing of this lawsuit or the proposed amendments to the Program Agreement will have a material impact on the level of future program income we will earn under the Program Agreement.

 

10.       Other Income

 

In the first quarter of fiscal year 2008, we recorded a one-time pension curtailment gain of $32.5 million, or 1.3% of revenues, as a result of our decision to freeze Pension and SERP benefits as of December 31, 2007See Note 5 for more information.

 

In the first quarter of fiscal year 2007, we received consideration aggregating $4.2 million, or 0.2% of revenues, in connection with the merger of Wedding Channel.com, in which we held a minority interest, and The Knot. We accounted for our investment in Wedding Channel.com under the cost method. In prior years, we had previously reduced our carrying value of this investment to zero.

 

11.       Commitments and Contingencies

 

Long-term Incentive Plan.  The Company has a long-term incentive plan (Long-term Incentive Plan) that provides for a cash incentive payable upon a change of control, as defined, subject to the attainment of certain performance objectives to employees who had historically been eligible for stock-based compensation programs of the Predecessor.  Performance objectives and targets are based on cumulative EBITDA percentages for three year periods beginning in fiscal year 2006.  Earned awards for each completed performance period will be credited to a book account and will earn interest at a contractually defined annual rate until the award is paid.  Awards will be paid within 30 days of a change of control or the first day there is a public market of at least 20% of total outstanding common stock.

 

15



 

Cash Incentive Plan.  The Company also has a cash incentive plan (Cash Incentive Plan) to aid in the retention of certain key executives.  The Cash Incentive Plan provides for the creation of a $14 million cash bonus pool. Each participant in the Cash Incentive Plan will be entitled to a cash bonus upon the earlier to occur of a change of control or an initial public offering, as defined in the Cash Incentive Plan, provided that the internal rate of return to the Sponsors is positive.

 

Litigation.  We are currently involved in various legal actions and proceedings that arose in the ordinary course of business. We believe that any liability arising as a result of these actions and proceedings will not have a material adverse effect on our financial position, results of operations or cash flows.

 

12.       Accumulated Other Comprehensive (Loss) Income

 

The following table shows the components of accumulated other comprehensive (loss) income:

 

(in thousands)

 

January 26,
2008

 

July 28,
2007

 

January 27,
2007

 

 

 

 

 

 

 

 

 

Unrealized (loss) gain on financial instruments

 

$

(31,052

)

$

3,733

 

$

6,843

 

Unfunded benefit obligations

 

15,709

 

17,365

 

 

Other

 

322

 

131

 

(1,320

)

Total accumulated other comprehensive (loss) income

 

$

(15,021

)

$

21,229

 

$

5,523

 

 

(in thousands)

 

Twenty-Six
weeks ended
January 26,
2008

 

Twenty-Six
weeks ended

July 28,
2007

 

Twenty-Six
weeks ended

January 27,
2007

 

 

 

 

 

 

 

 

 

Net earnings from condensed consolidated statements of earnings

 

$

123,061

 

$

43,682

 

$

68,252

 

Change in unrealized loss on financial instruments

 

(34,785

)

(3,110

)

(3,794

)

Other

 

(1,465

)

1,451

 

(512

)

Total comprehensive income for the period

 

$

86,811

 

$

42,023

 

$

63,946

 

 

13.       Segment Reporting

 

We have identified two reportable segments: Specialty Retail stores and Direct Marketing. The Specialty Retail stores segment includes all Neiman Marcus and Bergdorf Goodman retail stores, including Neiman Marcus clearance stores. The Direct Marketing segment conducts both online and print catalog operations under the Neiman Marcus, Bergdorf Goodman and Horchow brand names.  Both the Specialty Retail stores and Direct Marketing segments derive their revenues from the sales of high-end fashion apparel, accessories, cosmetics and fragrances from leading designers, precious and fashion jewelry and decorative home accessories.

 

Operating earnings for the segments include 1) revenues, 2) cost of sales, 3) direct selling, general, and administrative expenses, 4) other direct operating expenses, 5) income from credit card program and 6) depreciation expense for the respective segment.  Items not allocated to our operating segments include those items not considered by management in measuring the assets and profitability of our segments. These amounts include 1) corporate expenses including, but not limited to, treasury, investor relations, legal and finance support services, and general corporate management, 2) charges related to the application of purchase accounting adjustments made in connection with the Acquisition including amortization of customer lists and favorable lease commitments and other non-cash items and 3) interest expense.  These items, while often times related to the operations of a segment, are not considered by segment operating management, corporate operating management and the chief operating decision maker in assessing segment operating performance.  The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies (except with respect to purchase accounting adjustments not allocated to the operating segments). 

 

16



 

The following tables set forth the information for our reportable segments:

 

 

 

Quarter–to–Date

 

Year–to–Date

 

(in thousands)

 

Thirteen
weeks ended
January 26,
2008

 

Thirteen
weeks ended
January 27,
2007

 

Twenty-Six
weeks ended
January 26,
2008

 

Twenty-Six
weeks ended
January 27,
2007

 

 

 

 

 

 

 

 

 

 

 

REVENUES

 

 

 

 

 

 

 

 

 

Specialty Retail stores

 

$

1,136,324

 

$

1,069,946

 

$

2,097,921

 

$

1,949,879

 

Direct Marketing

 

237,531

 

225,890

 

408,177

 

385,169

 

Total

 

$

1,373,855

 

$

1,295,836

 

$

2,506,098

 

$

2,335,048

 

 

 

 

 

 

 

 

 

 

 

OPERATING EARNINGS

 

 

 

 

 

 

 

 

 

Specialty Retail stores

 

$

127,917

 

$

121,515

 

$

293,499

 

$

278,090

 

Direct Marketing

 

41,968

 

39,131

 

65,230

 

59,930

 

Subtotal

 

169,885

 

160,646

 

358,729

 

338,020

 

Corporate

 

(17,653

)

(14,792

)

(31,207

)

(24,070

)

Amortization of customer lists and favorable lease commitments

 

(17,953

)

(18,050

)

(35,949

)

(36,082

)

Other income (1)

 

 

 

32,450

 

4,210

 

Total

 

$

134,279

 

$

127,804

 

$

324,023

 

$

282,078

 

 

 

 

 

 

 

 

 

 

 

CAPITAL EXPENDITURES

 

 

 

 

 

 

 

 

 

Specialty Retail stores

 

$

36,421

 

$

23,274

 

$

76,610

 

$

61,491

 

Direct Marketing

 

5,714

 

5,989

 

11,563

 

9,191

 

Total

 

$

42,135

 

$

29,263

 

$

88,173

 

$

70,682

 

 

 

 

 

 

 

 

 

 

 

DEPRECIATION EXPENSE

 

 

 

 

 

 

 

 

 

Specialty Retail stores

 

$

30,331

 

$

29,493

 

$

60,262

 

$

58,434

 

Direct Marketing

 

3,776

 

3,410

 

7,821

 

6,480

 

Subtotal

 

34,107

 

32,903

 

68,083

 

64,914

 

Depreciation expense on step-up of fixed assets made in connection with the Acquisition

 

979

 

1,170

 

2,138

 

2,335

 

Total

 

$

35,086

 

$

34,073

 

$

70,221

 

$

67,249

 

 

 

 

 

 

 

 

January 26,
2008

 

January 27,
2007

 

ASSETS

 

 

 

 

 

 

 

 

 

Tangible assets of Specialty Retail stores

 

 

 

 

 

$

1,934,006

 

$

1,800,656

 

Tangible assets of Direct Marketing

 

 

 

 

 

175,161

 

157,400

 

Corporate assets:

 

 

 

 

 

 

 

 

 

Intangible assets related to Specialty Retail stores

 

 

 

 

 

3,550,983

 

3,600,475

 

Intangible assets related to Direct Marketing

 

 

 

 

 

562,219

 

587,218

 

Other

 

 

 

 

 

343,454

 

363,404

 

Total

 

 

 

 

 

$

6,565,823

 

$

6,509,153

 

 


(1) For the twenty-six weeks ended January 26, 2008, other income represents a one-time pension curtailment gain of $32.5 million as a result of our decision to freeze Pension and SERP benefits as of December 31, 2007For the twenty-six weeks ended January 27, 2007, other income represents the proceeds we received in connection with the merger of Wedding Channel.com, in which we held a minority interest, and The Knot. We had previously reduced our carrying value in this investment to zero.

 

17



 

14.       Condensed Consolidating Financial Information (with respect to NMG’s obligations under the Senior Notes and the Senior Subordinated Notes)

 

All of NMG's obligations under the Senior Notes and the Senior Subordinated Notes, as well as its obligations under the Asset-Based Revolving Credit Facility and the Senior Secured Term Loan Facility, are guaranteed by the Company and certain of NMG’s existing and future domestic subsidiaries (principally, Bergdorf Goodman, Inc. through which NMG conducts the operations of its Bergdorf Goodman stores and NM Nevada Trust which holds legal title to certain real property and intangible assets used by the Company in conducting its operations). The guarantees by the Company and each subsidiary guarantor are full and unconditional and joint and several.  Currently, the Company’s non-guarantor subsidiaries consist principally of an operating subsidiary domiciled in Canada providing support services to our Direct Marketing operations. Previously, our non-guarantor subsidiaries also included Kate Spade LLC (prior to its sale in December 2006), which is reflected in the tables below as discontinued operations.

 

The following condensed consolidating financial information represents the financial information of Neiman Marcus, Inc. and its wholly-owned subsidiary guarantors, prepared on the equity basis of accounting. The information is presented in accordance with the requirements of Rule 3-10 under the Securities and Exchange Commission's Regulation S-X. The financial information may not necessarily be indicative of results of operations, cash flows or financial position had the subsidiary guarantors operated as independent entities.

 

 

 

January 26, 2008

 

(in thousands)

 

Company

 

NMG

 

Guarantor
Subsidiaries

 

Non-
Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

 

$

234,321

 

$

881

 

$

545

 

$

 

$

235,747

 

Merchandise inventories

 

 

784,541

 

100,662

 

7

 

 

885,210

 

Other current assets

 

 

161,238

 

9,571

 

3,681

 

544

 

175,034

 

Total current assets

 

 

1,180,100

 

111,114

 

4,233

 

544

 

1,295,991

 

Property and equipment, net

 

 

925,987

 

136,681

 

2,066

 

 

1,064,734

 

Goodwill and intangible assets, net

 

 

1,922,766

 

2,190,436

 

 

 

4,113,202

 

Other assets

 

 

91,808

 

88

 

 

 

91,896

 

Investments in subsidiaries

 

1,647,834

 

2,320,138

 

 

 

(3,967,972

)

 

Total assets

 

$

1,647,834

 

$

6,440,799

 

$

2,438,319

 

$

6,299

 

$

(3,967,428

)

$

6,565,823

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

 

$

235,147

 

$

41,145

 

$

4,329

 

$

544

 

$

281,165

 

Accrued liabilities

 

 

329,710

 

79,626

 

57

 

 

409,393

 

Other current liabilities

 

 

2,946

 

 

 

 

2,946

 

Total current liabilities

 

 

567,803

 

120,771

 

4,386

 

544

 

693,504

 

Long-term liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

 

2,946,004

 

 

 

 

2,946,004

 

Deferred income taxes

 

 

962,712

 

 

 

 

962,712

 

Other long-term liabilities

 

 

316,446

 

(677

)

 

 

315,769

 

Total long-term liabilities

 

 

4,225,162

 

(677

)

 

 

4,224,485

 

Total shareholders’ equity

 

1,647,834

 

1,647,834

 

2,318,225

 

1,913

 

(3,967,972

)

1,647,834

 

Total liabilities and shareholders’ equity

 

$

1,647,834

 

$

6,440,799

 

$

2,438,319

 

$

6,299

 

$

(3,967,428

)

$

6,565,823

 

 

18



 

 

 

July 28, 2007

 

(in thousands)

 

Company

 

NMG

 

Guarantor
Subsidiaries

 

Non-
Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

 

$

139,333

 

$

1,196

 

$

678

 

$

 

$

141,207

 

Merchandise inventories

 

 

821,749

 

96,513

 

7

 

 

918,269

 

Other current assets

 

 

142,632

 

8,636

 

3,681

 

544

 

155,493

 

Total current assets

 

 

1,103,714

 

106,345

 

4,366

 

544

 

1,214,969

 

Property and equipment, net

 

 

901,072

 

140,473

 

2,166

 

 

1,043,711

 

Goodwill and intangible assets, net

 

 

1,945,040

 

2,194,979

 

 

 

4,140,019

 

Other assets

 

 

102,108

 

192

 

 

 

102,300

 

Investments in subsidiaries

 

1,558,012

 

2,333,438

 

 

 

(3,891,450

)

 

Total assets

 

$

1,558,012

 

$

6,385,372

 

$

2,441,989

 

$

6,532

 

$

(3,890,906

)

$

6,500,999

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

 

$

318,439

 

$

38,080

 

$

4,236

 

$

544

 

$

361,299

 

Accrued liabilities

 

 

329,625

 

73,479

 

58

 

 

403,162

 

Other current liabilities

 

 

3,426

 

 

 

 

3,426

 

Total current liabilities

 

 

651,490

 

111,559

4,294

 

544

 

767,887

 

Long-term liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

 

2,945,906

 

 

 

 

2,945,906

 

Deferred income taxes

 

 

1,002,982

 

 

 

 

1,002,982

 

Other long-term liabilities

 

 

226,982

 

(770

)

 

 

226,212

 

Total long-term liabilities

 

 

4,175,870

 

(770

)

 

 

4,175,100

 

Total shareholders’ equity

 

1,558,012

 

1,558,012

 

2,331,200

 

2,238

 

(3,891,450

)

1,558,012

 

Total liabilities and shareholders’ equity

 

$

1,558,012

 

$

6,385,372

 

$

2,441,989

 

$

6,532

 

$

(3,890,906

)

$

6,500,999

 

 

19



 

 

 

January 27, 2007

 

(in thousands)

 

Company

 

NMG

 

Guarantor
Subsidiaries

 

Non-
Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

 

$

187,772

 

$

767

 

$

8

 

$

 

$

188,547

 

Merchandise inventories

 

 

731,482

 

81,263

 

7

 

(461

)

812,291

 

Other current assets

 

 

154,994

 

11,025

 

3,681

 

544

 

170,244

 

Total current assets

 

 

1,074,248

 

93,055

 

3,696

 

83

 

1,171,082

 

Property and equipment, net

 

 

884,173

 

148,662

 

2,179

 

 

1,035,014

 

Goodwill and intangible assets, net

 

 

1,975,358

 

2,212,335

 

 

 

4,187,693

 

Other assets

 

 

115,069

 

295

 

 

 

115,364

 

Investments in subsidiaries

 

1,494,613

 

2,336,705

 

 

 

(3,831,318

)

 

Total assets

 

$

1,494,613

 

$

6,385,553

 

$

2,454,347

 

$

5,875

 

$

(3,831,235

)

$

6,509,153

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

 

$

267,444

 

$

27,725

 

$

4,772

 

$

544

 

$

300,485

 

Accrued liabilities

 

 

344,536

 

82,367

 

82

 

 

426,985

 

Other current liabilities

 

 

3,425

 

 

 

 

3,425

 

Total current liabilities

 

 

615,405

 

110,092

 

4,854

 

544

 

730,895