Document
Table of Contents


 
 
 
 
 
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 January 28, 2017
 
OR
 
o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from              to            
 
Commission file no. 333-133184-12
 
Neiman Marcus Group LTD LLC
(Exact name of registrant as specified in its charter) 
Delaware
20-3509435
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
1618 Main Street
Dallas, Texas
75201
(Address of principal executive offices)
(Zip code)
Registrant’s telephone number, including area code: (214) 743-7600
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes o  No ý
(Note: The registrant is a voluntary filer and not subject to the filing requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934. Although not subject to these filing requirements, the registrant has filed all reports that would have been required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months had the registrant been subject to such requirements.)
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes ý  No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer 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

 
 
 
 
 


Table of Contents


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



Table of Contents


NEIMAN MARCUS GROUP LTD LLC
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
 
(in thousands, except units)
 
January 28,
2017
 
July 30,
2016
 
January 30,
2016
 
 
 
 
 
 
 
ASSETS
 
 

 
 

 
 

Current assets:
 
 

 
 

 
 

Cash and cash equivalents
 
$
48,443

 
$
61,843

 
$
56,918

Merchandise inventories
 
1,213,483

 
1,125,325

 
1,165,682

Other current assets
 
166,875

 
146,878

 
127,741

Total current assets
 
1,428,801

 
1,334,046

 
1,350,341

 
 
 
 
 
 
 
Property and equipment, net
 
1,600,816

 
1,588,121

 
1,532,567

Intangible assets, net
 
3,036,228

 
3,244,502

 
3,539,925

Goodwill
 
2,067,449

 
2,072,818

 
2,270,101

Other long-term assets
 
23,291

 
17,401

 
18,160

Total assets
 
$
8,156,585

 
$
8,256,888

 
$
8,711,094

 
 
 
 
 
 
 
LIABILITIES AND MEMBER EQUITY
 
 

 
 

 
 

Current liabilities:
 
 

 
 

 
 

Accounts payable
 
$
384,148

 
$
317,736

 
$
287,463

Accrued liabilities
 
509,629

 
492,646

 
526,312

Current portion of long-term debt
 
29,426

 
29,426

 
29,426

Total current liabilities
 
923,203

 
839,808

 
843,201

 
 
 
 
 
 
 
Long-term liabilities:
 
 

 
 

 
 

Long-term debt
 
4,585,911

 
4,584,281

 
4,587,652

Deferred income taxes
 
1,211,788

 
1,296,793

 
1,405,824

Other long-term liabilities
 
625,872

 
592,875

 
466,509

Total long-term liabilities
 
6,423,571

 
6,473,949

 
6,459,985

 
 
 
 
 
 
 
Membership unit (1 unit issued and outstanding at January 28, 2017, July 30, 2016 and January 30, 2016)
 

 

 

Member capital
 
1,586,838

 
1,584,216

 
1,584,216

Accumulated other comprehensive loss
 
(111,201
)
 
(115,841
)
 
(54,520
)
Accumulated deficit
 
(665,826
)
 
(525,244
)
 
(121,788
)
Total member equity
 
809,811

 
943,131

 
1,407,908

Total liabilities and member equity
 
$
8,156,585

 
$
8,256,888

 
$
8,711,094

 
See Notes to Condensed Consolidated Financial Statements.


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NEIMAN MARCUS GROUP LTD LLC
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
 
 
 
Thirteen weeks ended
 
Twenty-six weeks ended
(in thousands)
 
January 28,
2017
 
January 30,
2016
 
January 28,
2017
 
January 30,
2016
 
 
 
 
 
 
 
 
 
Revenues
 
$
1,395,576

 
$
1,486,957

 
$
2,474,683

 
$
2,651,857

Cost of goods sold including buying and occupancy costs (excluding depreciation)
 
982,465

 
1,026,292

 
1,682,360

 
1,762,366

Selling, general and administrative expenses (excluding depreciation)
 
307,718

 
302,654

 
584,314

 
587,996

Income from credit card program
 
(16,750
)
 
(16,337
)
 
(30,418
)
 
(29,624
)
Depreciation expense
 
57,213

 
53,651

 
114,097

 
109,541

Amortization of intangible assets
 
12,881

 
14,095

 
26,504

 
29,448

Amortization of favorable lease commitments
 
13,443

 
13,537

 
27,097

 
27,149

Other expenses
 
5,211

 
8,048

 
12,029

 
25,146

Impairment charges
 
153,772

 

 
153,772

 

 
 
 
 
 
 
 
 
 
Operating earnings (loss)
 
(120,377
)
 
85,017

 
(95,072
)
 
139,835

 
 
 
 
 
 
 
 
 
Interest expense, net
 
74,197

 
71,495

 
146,280

 
143,180

 
 
 
 
 
 
 
 
 
Earnings (loss) before income taxes
 
(194,574
)
 
13,522

 
(241,352
)
 
(3,345
)
 
 
 
 
 
 
 
 
 
Income tax expense (benefit)
 
(77,505
)
 
5,638

 
(100,770
)
 
(691
)
 
 
 
 
 
 
 
 
 
Net earnings (loss)
 
$
(117,069
)
 
$
7,884

 
$
(140,582
)
 
$
(2,654
)


See Notes to Condensed Consolidated Financial Statements.




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NEIMAN MARCUS GROUP LTD LLC
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS (LOSS)
(UNAUDITED)
 
 
 
Thirteen weeks ended
 
Twenty-six weeks ended
(in thousands)
 
January 28,
2017
 
January 30,
2016
 
January 28,
2017
 
January 30,
2016
 
 
 
 
 
 
 
 
 
Net earnings (loss)
 
$
(117,069
)
 
$
7,884

 
$
(140,582
)
 
$
(2,654
)
 
 
 
 
 
 
 
 
 
Other comprehensive earnings (loss):
 
 

 
 

 
 

 
 
Foreign currency translation adjustments, before tax
 
(12,815
)
 
(4,610
)
 
(9,046
)
 
(4,441
)
Change in unrealized gain (loss) on financial instruments, before tax
 
18,768

 
(250
)
 
22,034

 
1,096

Reclassification of realized loss on financial instruments to earnings, before tax
 
833

 
58

 
1,424

 
67

Change in unrealized loss on unfunded benefit obligations, before tax
 
539

 
(147
)
 
(5,828
)
 
(1,152
)
Tax effect related to items of other comprehensive earnings (loss)
 
(3,655
)
 
1,329

 
(3,944
)
 
1,138

Total other comprehensive earnings (loss)
 
3,670

 
(3,620
)
 
4,640

 
(3,292
)
 
 
 
 
 
 
 
 
 
Total comprehensive earnings (loss)
 
$
(113,399
)
 
$
4,264

 
$
(135,942
)
 
$
(5,946
)
 
See Notes to Condensed Consolidated Financial Statements.


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NEIMAN MARCUS GROUP LTD LLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
 
Twenty-six weeks ended
(in thousands)
 
January 28,
2017
 
January 30,
2016
 
 
 
 
 
CASH FLOWS - OPERATING ACTIVITIES
 
 

 
 

Net loss
 
$
(140,582
)
 
$
(2,654
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 

 
 

Depreciation and amortization expense
 
179,962

 
178,424

Impairment charges
 
153,772

 

Deferred income taxes
 
(89,374
)
 
(32,961
)
Other
 
607

 
4,718

 
 
104,385

 
147,527

Changes in operating assets and liabilities:
 
 

 
 

Merchandise inventories
 
(72,050
)
 
(11,901
)
Other current assets
 
(20,282
)
 
(1,688
)
Accounts payable and accrued liabilities
 
73,637

 
(33,234
)
Deferred real estate credits
 
32,502

 
18,079

Funding of defined benefit pension plan
 
(2,500
)
 

Net cash provided by operating activities
 
115,692

 
118,783

 
 
 
 
 
CASH FLOWS - INVESTING ACTIVITIES
 
 

 
 

Capital expenditures
 
(113,967
)
 
(153,760
)
Acquisition of MyTheresa
 

 
(896
)
Net cash used for investing activities
 
(113,967
)
 
(154,656
)
 
 
 
 
 
CASH FLOWS - FINANCING ACTIVITIES
 
 

 
 

Borrowings under senior secured asset-based revolving credit facility
 
385,000

 
350,000

Repayment of borrowings under senior secured asset-based revolving credit facility
 
(380,000
)
 
(315,000
)
Repayment of borrowings under senior secured term loan facility
 
(14,713
)
 
(14,713
)
Debt issuance costs paid
 
(5,359
)
 

Net cash provided by (used for) financing activities
 
(15,072
)
 
20,287

 
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
 
(53
)
 
(470
)
 
 
 
 
 
CASH AND CASH EQUIVALENTS
 
 

 
 

Decrease during the period
 
(13,400
)
 
(16,056
)
Beginning balance
 
61,843

 
72,974

Ending balance
 
$
48,443

 
$
56,918

 
 
 
 
 
Supplemental Schedule of Cash Flow Information
 
 

 
 

Cash paid (received) during the period for:
 
 

 
 

Interest
 
$
145,663

 
$
135,384

Income taxes
 
$
(1,748
)
 
$
15,172

Non-cash - investing and financing activities:
 
 

 
 

Property and equipment acquired through developer financing obligations
 
$
28,432

 
$

See Notes to Condensed Consolidated Financial Statements.

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NEIMAN MARCUS GROUP LTD LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
 
1.              Basis of Presentation
 
Neiman Marcus Group LTD LLC (the "Company") is a luxury omni-channel retailer conducting store and online operations principally under the Neiman Marcus, Bergdorf Goodman, Last Call and MyTheresa brand names.  References to “we,” “our” and “us” are used to refer to the Company or collectively to the Company and its subsidiaries, as appropriate to the context.

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

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

The accompanying Condensed Consolidated Financial Statements set forth financial information of the Company and its subsidiaries on a consolidated basis.  All significant intercompany accounts and transactions have been eliminated.

Our fiscal year ends on the Saturday closest to July 31.  Like many other retailers, we follow a 4-5-4 reporting calendar, which means that each fiscal quarter consists of thirteen weeks divided into periods of four weeks, five weeks and four weeks.  All references to (i) the second quarter of fiscal year 2017 relate to the thirteen weeks ended January 28, 2017, (ii) the second quarter of fiscal year 2016 relate to the thirteen weeks ended January 30, 2016, (iii) year-to-date fiscal 2017 relate to the twenty-six weeks ended January 28, 2017 and (iv) year-to-date fiscal 2016 relate to the twenty-six weeks ended January 30, 2016.
 
We have prepared the accompanying Condensed Consolidated Financial Statements in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial information and Rule 10-01 of Regulation S-X of the Securities Act of 1933, as amended.  Accordingly, these financial statements do not include all of the information and footnotes required by GAAP for complete financial statements.  Therefore, these financial statements should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended July 30, 2016.  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 second quarter of fiscal year 2017 are not necessarily comparable to, or indicative of, results of any other interim period or for the fiscal year as a whole.

Certain prior period balances have been reclassified to conform to the current period presentation due primarily to our adoption of recent accounting pronouncements related to the presentation of debt issuance costs and deferred income taxes.
 
A detailed description of our critical accounting policies is included in our Annual Report on Form 10-K for the fiscal year ended July 30, 2016.

Use of Estimates.  We are required to make estimates and assumptions about future events in preparing our financial statements in conformity with GAAP.  These estimates and assumptions affect the amounts of assets, liabilities, revenues and expenses and the disclosure of gain and loss contingencies at the date of the accompanying Condensed Consolidated Financial Statements.
 
While we believe that our past estimates and assumptions have been materially accurate, the amounts currently estimated are subject to change if different assumptions as to the outcome of future events were made.  We evaluate our estimates and assumptions on an ongoing basis and predicate those estimates and assumptions on historical experience and on various other factors that we believe are reasonable under the circumstances.  We make adjustments to our estimates and assumptions when facts and circumstances dictate.  Since future events and their effects cannot be determined with absolute certainty, actual results may differ from the estimates and assumptions used in preparing the accompanying Condensed Consolidated Financial Statements.


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

recognition of revenues;
valuation of merchandise inventories, including determination of original retail values, recognition of markdowns and vendor allowances, estimation of inventory shrinkage and determination of cost of goods sold;
determination of impairment of intangible and long-lived assets;
measurement of liabilities related to our loyalty program;
recognition of income taxes; and
measurement of accruals for general liability, workers’ compensation and health insurance claims and pension and postretirement health care benefits.
Segments. We conduct our specialty retail store and online operations on an omni-channel basis. As our store and online operations have similar economic characteristics, products, services and customers, our operations constitute a single omni-channel reportable segment.
 
Newly Adopted Accounting Pronouncements. In April 2015, the Financial Accounting Standards Board (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. We adopted this guidance in the fourth quarter of fiscal year 2016 on a retrospective basis. Unamortized debt issuance costs, except unamortized debt issuance costs related to our Asset-Based Revolving Credit Facility, are now presented as a direct reduction of long-term debt on the Company's Condensed Consolidated Balance Sheets as of January 28, 2017, July 30, 2016, and January 30, 2016. Unamortized debt issuance costs of $114.1 million as of January 30, 2016 have been reclassified on our Condensed Consolidated Balance Sheet from other assets to a direct reduction of long-term debt.

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. We adopted this guidance in the fourth quarter of fiscal year 2016 on a retrospective basis. Deferred taxes previously classified as components of current assets are now classified as long-term liabilities on the Company's Condensed Consolidated Balance Sheets as of January 28, 2017, July 30, 2016 and January 30, 2016. Current deferred tax assets of $40.4 million as of January 30, 2016 have been netted against non-current deferred tax liabilities on our Condensed Consolidated Balance Sheet.

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. We adopted this guidance in the first quarter of fiscal year 2017 on a prospective basis. The adoption of this guidance did not have a material impact on our Condensed Consolidated Financial Statements.

In January 2017, the FASB issued guidance to simplify how an entity is required to test goodwill for impairment. The new standard allows (i) entities to perform annual, or interim, goodwill impairment testing by comparing the reporting unit's fair value with its carrying amount and (ii) recognize impairment charges for the amount by which the carrying amount exceeds the reporting unit’s fair value. Pursuant to prior guidance, a goodwill impairment loss was determined by comparing the implied fair value of a reporting unit's goodwill with the carrying amount of that goodwill. In computing the implied fair value of goodwill, an entity had to perform procedures to determine the fair value of its assets and liabilities at the impairment testing date consistent with procedures that are required in determining the fair value of assets acquired and liabilities assumed in a business combination. To the extent the fair value of our reporting units exceeds the carrying value in future periods, we plan to adopt this guidance at that time.


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Recent Accounting Pronouncements. 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.

In May 2014, the FASB issued guidance to clarify the principles for revenue recognition. The standard outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes previous revenue recognition guidance. 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 February 2016, the FASB issued guidance that requires a lessee to recognize assets and liabilities arising from leases on the balance sheet. Previous GAAP did not require lease assets and liabilities to be recognized for most leases. Additionally, companies are permitted to make an accounting policy election not to recognize lease assets and liabilities for leases with a term of 12 months or less. For both finance leases and operating leases, the lease liability should be initially measured at the present value of the remaining contractual lease payments. The recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee will not significantly change under this new guidance. This new guidance is effective for us as of the first quarter of fiscal year 2020.

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.


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 $24.5 million, or €23.2 million, at January 28, 2017, which is included in accrued liabilities.


3.              Fair Value Measurements
 
Certain of our assets and liabilities are required to be measured at fair value on a recurring basis. Fair value is the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the 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.

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The following table shows the Company’s financial 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
 
January 28,
2017
 
July 30,
2016
 
January 30,
2016
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
Interest rate swaps (included in other long-term assets)
 
Level 2
 
$
8,960

 
$

 
$

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

 
$
13,167

 
$

Contingent earn-out obligation (included in accrued liabilities)
 
Level 3
 
24,520

 
26,264

 
28,786

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

 

 
25,005

Stock-based award liability (included in other long-term liabilities)
 
Level 3
 
3,269

 
5,500

 
19,753

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

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

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

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:
 
 
 
 
January 28, 2017
 
July 30, 2016
 
January 30, 2016
(in thousands)
 
Fair Value
Hierarchy
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
 
Fair
Value
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Long-term debt:
 
 
 
 

 
 

 
 

 
 

 
 

 
 

Asset-Based Revolving Credit Facility
 
Level 2
 
$
170,000

 
$
170,000

 
$
165,000

 
$
165,000

 
$
165,000

 
$
165,000

Senior Secured Term Loan Facility
 
Level 2
 
2,854,346

 
2,392,313

 
2,869,059

 
2,705,896

 
2,883,772

 
2,508,882

Cash Pay Notes
 
Level 2
 
960,000

 
625,680

 
960,000

 
818,995

 
960,000

 
720,000

PIK Toggle Notes
 
Level 2
 
600,000

 
367,500

 
600,000

 
480,000

 
600,000

 
387,000

2028 Debentures
 
Level 2
 
122,570

 
103,985

 
122,463

 
120,325

 
122,356

 
117,375


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

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aggregate principal amount of 7.125% Debentures due 2028 (the "2028 Debentures" and, together with the Cash Pay Notes and the PIK Toggle Notes, the "Notes").
 
In connection with purchase accounting, we adjusted the carrying values of our long-lived and intangible assets to their estimated fair values at the acquisition date. The fair value estimates were based upon assumptions related to the future cash flows, discount rates and asset lives utilizing currently available information, and in some cases, valuation results from independent valuation specialists (Level 3 determination of fair value). Subsequent to the Acquisition, we determine the fair value of our long-lived and intangible assets on a non-recurring basis in connection with our periodic evaluations of such assets for potential impairment and record impairment charges when such fair value estimates are lower than the carrying values of the assets.


4.     Intangible Assets, Net and Goodwill
 
(in thousands)
 
January 28,
2017
 
July 30,
2016
 
January 30,
2016
 
 
 
 
 
 
 
Favorable lease commitments, net
 
$
956,959

 
$
985,534

 
$
1,013,291

Other definite-lived intangible assets, net
 
424,975

 
451,722

 
491,537

Tradenames
 
1,654,294

 
1,807,246

 
2,035,097

Intangible assets, net
 
$
3,036,228

 
$
3,244,502

 
$
3,539,925

 
 
 
 
 
 
 
Goodwill
 
$
2,067,449

 
$
2,072,818

 
$
2,270,101


Intangible Assets Subject to Amortization. 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). Our definite-lived intangible assets, which primarily consist of customer lists, are amortized using accelerated methods which reflect the pattern in which we receive the economic benefit of the asset, currently estimated at six to 16 years (weighted average life of 13 years from the respective acquisition dates). 

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):
January 29, 2017 through July 29, 2017
$
49,534

2018
96,626

2019
93,567

2020
86,872

2021
81,043

2022
81,807


At January 28, 2017, accumulated amortization was $177.7 million for favorable lease commitments and $274.3 million for other definite-lived intangible assets.

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


5.     Impairment Charges

Impairment of Indefinite-lived Intangible Assets, Goodwill and Long-lived Assets. We assess the recoverability of the carrying values of indefinite-lived intangible assets and goodwill as well as our store assets, consisting of property and equipment, customer lists and favorable lease commitments, annually in the fourth quarter of each fiscal year and upon the occurrence of certain events. These impairment assessments are performed for each of our four reporting units — Neiman Marcus, Bergdorf Goodman, Last Call and MyTheresa.


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Since fiscal year 2016, we have experienced declines in our operating results and we believe our operating results have been adversely impacted by a number of factors including, among other things:
    
volatility in domestic and global economic conditions;
national and global geo-political uncertainty;
the strength of the U.S. dollar against international currencies, most notably the Euro and British pound, and a resulting decrease in tourism and spending by international customers; and
the continuation of low global prices for crude oil and the resulting impact on stakeholders in the oil and gas industries, particularly in the Texas markets in which we have a significant presence.

Based upon our assessment of economic conditions, our expectations of future business conditions and trends and our projected revenues, earnings and cash flows, we determined that impairment charges were required to state certain of our intangible and long-lived assets, primarily related to our Neiman Marcus brand, to their estimated fair value as of the fourth quarter of fiscal year 2016.

In the second quarter of fiscal year 2017, we concluded that it was appropriate to assess the recoverability of the carrying values of our indefinite-lived intangible assets and goodwill as well as our store assets as a result of (i) the continuation of adverse economic and business trends, (ii) revisions to our anticipated future operating results and (iii) increases in the weighted average cost of capital used in estimating the fair value of our tradenames and our reporting units under a discounted cash flow model. In the second quarter of fiscal year 2017, we recorded impairment charges of $153.8 million to state certain of our intangible and long-lived assets, primarily related to our Neiman Marcus brand, to their estimated fair value.

Impairment charges recorded were as follows:
 
Thirteen weeks ended
(in thousands)
January 28,
2017
 
July 30,
2016
Tradenames
$
150,106

 
$
228,877

Goodwill

 
199,218

Property and equipment
2,189

 
25,426

Other definite-lived intangible assets
1,477

 
12,634

Total
$
153,772

 
$
466,155


We continue to undertake initiatives to help drive revenues and streamline business activities and will continue to closely monitor our financial condition and results of operations. However, there is a risk that we may continue to experience challenging economic conditions and operating pressures, which in turn could increase the risk of additional impairment charges in future periods.


6.              Long-term Debt
 
The significant components of our long-term debt are as follows:
(in thousands)
 
Interest
Rate
 
January 28,
2017
 
July 30,
2016
 
January 30,
2016
 
 
 
 
 
 
 
 
 
Asset-Based Revolving Credit Facility
 
variable
 
$
170,000

 
$
165,000

 
$
165,000

Senior Secured Term Loan Facility
 
variable
 
2,854,346

 
2,869,059

 
2,883,772

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%
 
122,570

 
122,463

 
122,356

Total debt
 
 
 
4,706,916

 
4,716,522

 
4,731,128

Less: current portion of Senior Secured Term Loan Facility
 
 
 
(29,426
)
 
(29,426
)
 
(29,426
)
Less: unamortized debt issuance costs
 
 
 
(91,579
)
 
(102,815
)
 
(114,050
)
Long-term debt
 
 
 
$
4,585,911

 
$
4,584,281

 
$
4,587,652


10

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Asset-Based Revolving Credit Facility.  On October 27, 2016, we entered into an amendment of the Asset-Based Revolving Credit Facility (the "ABL Refinancing Amendment"). As amended, the maximum committed borrowing capacity under the Asset-Based Revolving Credit Facility remains at $900.0 million and the Asset-Based Revolving Credit Facility matures on July 25, 2021 (or July 25, 2020 if our obligations under our Senior Secured Term Loan Facility or any permitted refinancing thereof have not been repaid or the maturity date thereof has not been extended to October 25, 2021 or later).  At January 28, 2017, we had $170.0 million of borrowings outstanding under this facility, $1.8 million of outstanding letters of credit and $638.3 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 minimum 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 $1,100.0 million, but our ability to borrow would still be limited by the amount of the borrowing base.  The cash proceeds of any incremental term loans may be used for working capital and general corporate purposes.

At January 28, 2017, borrowings under the Asset-Based Revolving Credit Facility bore interest at a rate per annum equal to, at our option, either (a) a base rate determined by reference to the highest of (1) the prime rate of Deutsche Bank AG New York Branch (the administrative agent), (2) the federal funds effective rate plus ½ of 1.00% and (3) the adjusted one-month LIBOR plus 1.00% or (b) LIBOR, subject to certain adjustments, in each case plus an applicable margin of 0.75% with respect to base rate borrowings and 1.75% with respect to LIBOR borrowings at January 28, 2017.  The applicable margin is based on the average historical excess availability under the Asset-Based Revolving Credit Facility, and is up to 1.00% with respect to base rate borrowings and up to 2.00% with respect to LIBOR borrowings, in each case with 0.25% step downs based on achievement and maintenance of a certain senior secured first lien net leverage ratio (as defined in the credit agreement governing the Asset-Based Revolving Credit Facility).  The weighted average interest rate on the outstanding borrowings pursuant to the Asset-Based Revolving Credit Facility was 2.69% at January 28, 2017.  In addition, we are required to pay a commitment fee in respect of unused commitments at a rate of up to 0.375% per annum.  We must also pay customary letter of credit fees and agency fees.

If at any time the aggregate amount of outstanding revolving loans, unreimbursed letter of credit drawings and undrawn letters of credit under the Asset-Based Revolving Credit Facility exceeds the lesser of (a) the aggregate revolving commitments and (b) the borrowing base, we will be required to repay outstanding loans or cash collateralize letters of credit in an aggregate amount equal to such excess, with no reduction of the commitment amount.  If the excess availability under the Asset-Based Revolving Credit Facility is less than the greater of (a) 10% of the lesser of (1) the aggregate revolving commitments and (2) the borrowing base and (b) $50.0 million for a period of five or more consecutive business days, funds held in a collection account maintained with the agent would be applied to repay the loans and other obligations and cash collateralize letters of credit.  We would then be required to make daily deposits in the collection account maintained with the agent under the Asset-Based Revolving Credit Facility.
We may voluntarily reduce the unutilized portion of the commitment amount and repay outstanding loans at any time without premium or penalty other than customary breakage costs with respect to LIBOR loans.  There is no scheduled amortization under the Asset-Based Revolving Credit Facility. The principal amount of the revolving loans outstanding thereunder will be due and payable in full on July 25, 2021 (or July 25, 2020 if our obligations under our Senior Secured Term Loan Facility or any permitted refinancing thereof have not been repaid or the maturity date thereof has not been extended to October 25, 2021 or later).
 
The Asset-Based Revolving Credit Facility is guaranteed by Holdings and each of our current and future direct and indirect wholly owned subsidiaries (subsidiary guarantors) other than (a) unrestricted subsidiaries, (b) certain immaterial subsidiaries, (c) foreign subsidiaries and any domestic subsidiary of a foreign subsidiary, (d) certain holding companies of foreign subsidiaries, (e) captive insurance subsidiaries, not for profit subsidiaries, or a subsidiary which is a special purpose entity for securitization transactions or like special purposes and (f) any subsidiary that is prohibited by applicable law or contractual obligation from acting as a guarantor

11

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or which would require governmental approval to provide a guarantee. At January 28, 2017, the assets of non-guarantor subsidiaries, primarily NMG Germany GmbH (through which we conduct the operations of MyTheresa), were $281.1 million, or 3.4% of consolidated total assets. All obligations under the Asset-Based Revolving Credit Facility, and the guarantees of those obligations, are secured, subject to certain significant exceptions, by substantially all of the assets of Holdings, the Company and the subsidiary guarantors.
The Asset-Based Revolving Credit Facility contains covenants limiting, among other things, dividends and other restricted payments, investments, loans, advances and acquisitions, and prepayments or redemptions of other indebtedness.  These covenants 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 9 of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended July 30, 2016.
 
Senior Secured Term Loan Facility.  On October 25, 2013, we entered into a credit agreement and related security and other agreements for the $2,950.0 million Senior Secured Term Loan Facility. At January 28, 2017, the outstanding balance under the Senior Secured Term Loan Facility was 2,854.3 million. The principal amount of the loans outstanding is due and payable in full on October 25, 2020.
 
The Senior Secured Term Loan Facility permits us to increase the term loans or add a separate tranche of term loans by an amount not to exceed $650.0 million plus an unlimited amount that would result (a) in the case of any incremental term loan facility to be secured equally and ratably with the term loans, a senior secured first lien net leverage ratio equal to or less than 4.25 to 1.00, and (b) in the case of any incremental term loan facility to be secured on a junior basis to the term loans, to be subordinated in right of payment to the term loans or unsecured and pari passu in right of payment with the term loans, a total net leverage ratio equal to or less than the total net leverage ratio as of October 25, 2013.

At January 28, 2017, borrowings under the Senior Secured Term Loan Facility bore interest at a rate per annum equal to, at our option, either (a) a base rate determined by reference to the highest of (1) the prime rate of Credit Suisse AG (the administrative agent), (2) the federal funds effective rate plus ½ of 1.00% and (3) the adjusted one-month LIBOR plus 1.00%, or (b) an adjusted LIBOR (for a period equal to the relevant interest period, and in any event, never less than 1.00%), subject to certain adjustments, in each case plus an applicable margin.  The applicable margin is up to 2.25% with respect to base rate borrowings and up to 3.25% with respect to LIBOR borrowings.  The applicable margin is subject to adjustment based on our senior secured first lien net leverage ratio.  The applicable margin with respect to outstanding LIBOR borrowings was 3.25% at January 28, 2017.  The interest rate on the outstanding borrowings pursuant to the Senior Secured Term Loan Facility was 4.25% at January 28, 2017.
 
Subject to certain exceptions and reinvestment rights, the Senior Secured Term Loan Facility requires that 100% of the net cash proceeds from certain asset sales and debt issuances and 50% (which percentage will be reduced to 25% if our senior secured first lien net leverage ratio, as defined in the credit agreement governing the Senior Secured Term Loan Facility, is equal to or less than 4.0 to 1.0 but greater than 3.5 to 1.0 and will be reduced to 0% if our senior secured first lien net leverage ratio is equal to or less than 3.5 to 1.0) from excess cash flow, as defined in the credit agreement governing the Senior Secured Term Loan Facility, for each of our fiscal years (commencing with the period ended July 26, 2015) must be used to prepay outstanding term loans under the Senior Secured Term Loan Facility at 100% of the principal amount to be prepaid, plus accrued and unpaid interest. We were not required to prepay any outstanding term loans pursuant to the annual excess cash flow requirements for fiscal year 2016.
 
We may repay all or any portion of the Senior Secured Term Loan Facility at any time, subject to redeployment costs in the case of prepayment of LIBOR borrowings other than the last day of the relevant interest period. The Senior Secured Term Loan Facility amortizes in equal quarterly installments of $7.4 million, less certain voluntary and mandatory prepayments, with the remaining balance due at final maturity.
 
The Senior Secured Term Loan Facility is guaranteed by Holdings and each of our current and future subsidiary guarantors other than (a) unrestricted subsidiaries, (b) certain immaterial subsidiaries, (c) foreign subsidiaries and any domestic subsidiary of a

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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 January 28, 2017, the assets of non-guarantor subsidiaries, primarily NMG Germany GmbH (through which we conduct the operations of MyTheresa), were $281.1 million, or 3.4% of consolidated total assets. All obligations under the Senior Secured Term Loan Facility, and the guarantees of those obligations, are secured, subject to certain 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 9 of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended July 30, 2016.
 
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.  At January 28, 2017, the redemption price at which we may redeem the Cash Pay Notes, in whole or in part, as set forth in the indenture governing the Cash Pay Notes, was 106.000%. The Cash Pay Notes mature on October 15, 2021.

For a more detailed description of the Cash Pay Notes, refer to Note 9 of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended July 30, 2016.

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. At January 28, 2017, the redemption price at which we may redeem the PIK Toggle Notes, in whole or in part, as set forth in the indenture governing the PIK Toggle Notes, was 106.563%. 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 six interest payments and future interest payments, subject to certain restrictions, may be paid (i) entirely in cash ("Cash Interest"), (ii) entirely by increasing the principal amount of the PIK Toggle Notes by the relevant interest payment amount ("PIK Interest"), or (iii) 50% in Cash Interest and 50% in PIK Interest. We may elect to pay interest in the form of PIK Interest or partial PIK Interest on each of our semi-annual interest payments due in October 2017, April 2018 and October 2018. If we elect PIK Interest or partial PIK Interest with respect to these interest payments, we must deliver a notice of such election to the trustee no later than one day prior to the beginning of the relevant semi-annual interest period.  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.

For a more detailed description of the PIK Toggle Notes, refer to Note 9 of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended July 30, 2016.

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 January 28, 2017, 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 9 of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended July 30, 2016.

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Maturities of Long-term Debt.  At January 28, 2017, annual maturities of long-term debt during the current and next five fiscal years and thereafter are as follows (in millions):
January 29, 2017 through July 29, 2017
$
14.7

2018
29.4

2019
29.4

2020
29.4

2021
2,921.4

2022
1,560.0

Thereafter
122.6


The previous table does not reflect future excess cash flow prepayments, if any, that may be required under the Senior Secured Term Loan Facility.
 
Interest Expense, net.  The significant components of interest expense are as follows:
 
 
Thirteen weeks ended
 
Twenty-six weeks ended
(in thousands)
 
January 28,
2017
 
January 30,
2016
 
January 28,
2017
 
January 30,
2016
 
 
 
 
 
 
 
 
 
Asset-Based Revolving Credit Facility
 
$
1,366

 
$
735

 
$
2,570

 
$
1,609

Senior Secured Term Loan Facility
 
31,982

 
31,089

 
62,835

 
62,258

Cash Pay Notes
 
19,200

 
19,200

 
38,400

 
38,400

PIK Toggle Notes
 
13,125

 
13,125

 
26,250

 
26,250

2028 Debentures
 
2,226

 
2,226

 
4,453

 
4,453

Amortization of debt issue costs
 
6,121

 
6,143

 
12,264

 
12,286

Capitalized interest
 
(1,529
)
 
(1,683
)
 
(3,244
)
 
(3,299
)
Other, net
 
1,706

 
660

 
2,752

 
1,223

Interest expense, net
 
$
74,197

 
$
71,495

 
$
146,280

 
$
143,180



7.              Derivative Financial Instruments
 
Interest Rate Swaps. At January 28, 2017, we had outstanding floating rate debt obligations of $3,024.3 million. In April and June of 2016, we entered into floating to fixed interest rate swap agreements for an aggregate notional amount of $1,400.0 million to limit our exposure to interest rate increases related to a portion of our floating rate indebtedness. These swap agreements hedge a portion of our contractual floating rate interest commitments related to our Senior Secured Term Loan Facility from December 2016 to October 2020. As a result of the April 2016 swap agreements, our effective interest rate as to $700.0 million of floating rate indebtedness will be fixed at 4.912% from December 2016 through October 2020. As a result of the June 2016 swap agreements, our effective interest rate as to an additional $700.0 million of floating rate indebtedness will be fixed at 4.7395% from December 2016 to October 2020. The fair value of our interest rate swap agreements was a gain of $9.0 million at January 28, 2017, which amount is included in other long-term assets, and a loss of $13.2 million at July 30, 2016, which amount is included in other long-term liabilities. The interest rate swap agreements expire in October 2020.

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

Interest Rate Caps. In April 2014, we entered into interest rate cap agreements (at a cost of $2.0 million) for an aggregate notional amount of $1,400.0 million to hedge the variability of our cash flows related to a portion of our floating rate indebtedness. The interest rate cap agreements effectively capped LIBOR related to our Senior Secured Term Loan Facility at 3.00% from December 2014 through December 2016 with respect to the $1,400.0 million notional amount of such agreements. The interest rate cap agreements expired in December 2016.


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Gains and losses realized due to the expiration of applicable portions of the interest rate caps were reclassified to interest expense at the time our quarterly interest payments were made.  Losses of $0.8 million were realized in the second quarter of fiscal year 2017, $0.1 million in the second quarter of fiscal year 2016, $1.4 million in year-to-date fiscal 2017 and $0.1 million in year-to-date fiscal 2016.


8.              Income Taxes
 
Our effective income tax rates are as follows:
 
 
Thirteen weeks ended
 
Twenty-six weeks ended
 
 
January 28,
2017
 
January 30,
2016
 
January 28,
2017
 
January 30,
2016
 
 

 

 

 

Effective income tax rate
 
39.8
%
 
41.7
%
 
41.8
%
 
20.7
%

Our effective income tax rate on the loss for the second quarter of fiscal year 2017 exceeded the federal statutory tax rate of 35% due primarily to state income taxes. Our effective income tax rate on the earnings for the second quarter of fiscal year 2016 exceeded the federal statutory tax rate due primarily to state income taxes and the non-deductible portion of transaction and other costs incurred in connection with the MyTheresa acquisition, partially offset by reductions in our estimated tax reserves due to the expiration of statute of limitations.

Our effective income tax rate on the loss for year-to-date fiscal 2017 exceeded the federal statutory tax rate of 35% due primarily to state income taxes, the non-deductible portion of transaction and other costs incurred in connection with the MyTheresa acquisition and the benefit associated with the release of certain tax reserves for settled tax matters. Our effective income tax rate on the loss for year-to-date fiscal 2016 was less than the federal statutory tax rate due primarily to lower statutory tax rates applicable to the Company's operations in foreign jurisdictions and the non-deductible portion of transaction and other costs incurred in connection with the MyTheresa acquisition.
 
At January 28, 2017, the gross amount of unrecognized tax benefits was $0.8 million ($0.5 million of which would impact our effective tax rate, if recognized).  We classify interest and penalties as a component of income tax expense (benefit) and our liability for accrued interest and penalties was $0.1 million at January 28, 2017, $0.4 million at July 30, 2016 and $4.0 million at January 30, 2016.
 
We file income tax returns in the U.S. federal jurisdiction and various state, local and foreign jurisdictions.  The Internal Revenue Service ("IRS") finalized its audits of our fiscal year 2012 and short-year 2013 (prior to the Acquisition) federal income tax returns. With respect to state, local and foreign jurisdictions, with limited exceptions, we are no longer subject to income tax audits for fiscal years before 2012.  We believe our recorded tax liabilities as of January 28, 2017 are sufficient to cover any potential assessments made by the IRS or other taxing authorities and we will continue to review our recorded tax liabilities for potential audit assessments based upon subsequent events, new information and future circumstances.  We believe it is reasonably possible that adjustments to the amounts of our unrecognized tax benefits could occur within the next 12 months as a result of settlements with tax authorities or expiration of statutes of limitations.  At this time, we do not believe such adjustments will have a material impact on our Condensed Consolidated Financial Statements.
 
Subsequent to the Acquisition, Parent and its subsidiaries, including the Company, file U.S. federal income taxes as a consolidated group.  The Company has elected to be treated as a corporation for U.S. federal income tax purposes and all operations of Parent are conducted through Holdings and its subsidiaries, including the Company. Income taxes incurred by Parent are reflected by the Company and its subsidiaries in the preparation of our Condensed Consolidated Financial Statements. There are no differences in current and deferred income taxes between the Company and Parent.


9.              Employee Benefit Plans
 
Description of Benefit Plans.  We currently maintain defined contribution plans consisting of a retirement savings plan ("RSP") and a defined contribution supplemental executive retirement plan ("Defined Contribution SERP Plan").  In addition, we sponsor a defined benefit pension plan ("Pension Plan") and an unfunded supplemental executive retirement plan ("SERP Plan") 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

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limited postretirement health care benefits ("Postretirement Plan") if they meet certain service and minimum age requirements.  We also sponsor an unfunded key employee deferred compensation plan, which provides certain employees with additional benefits.
Our obligations for employee benefit plans, included in other long-term liabilities, are as follows:
(in thousands)
 
January 28,
2017
 
July 30,
2016
 
January 30,
2016
 
 
 
 
 
 
 
Pension Plan
 
$
300,543

 
$
299,676

 
$
219,486

SERP Plan
 
119,807

 
118,484

 
109,556

Postretirement Plan
 
8,220

 
8,600

 
9,038

 
 
428,570

 
426,760

 
338,080

Less: current portion
 
(6,553
)
 
(7,345
)
 
(6,016
)
Long-term portion of benefit obligations
 
$
422,017

 
$
419,415

 
$
332,064

 
Funding Policy and Status.  Our policy is to fund the Pension Plan at or above the minimum level required by law.  In fiscal year 2016, we were not required to make contributions to the Pension Plan. As of January 28, 2017, we believe we will be required to contribute $10.7 million to the Pension Plan in fiscal year 2017, of which $2.5 million was contributed in the second quarter of fiscal year 2017.

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
 
Twenty-six weeks ended
(in thousands)
 
January 28,
2017
 
January 30,
2016
 
January 28,
2017
 
January 30,
2016
 
 
 
 
 
 
 
 
 
Pension Plan:
 
 

 
 

 
 
 
 
Interest cost
 
$
4,870

 
$
5,429

 
$
9,740

 
$
10,858

Expected return on plan assets
 
(5,331
)
 
(5,807
)
 
(10,662
)
 
(11,614
)
Net amortization of losses
 
663

 

 
1,326

 

Pension Plan expense (income)
 
$
202

 
$
(378
)
 
$
404

 
$
(756
)
 
 
 
 
 
 
 
 
 
SERP Plan:
 
 

 
 

 
 
 
 
Interest cost
 
$
784

 
$
892

 
$
1,568

 
$
1,784

Net amortization of losses
 
23

 

 
46

 

SERP Plan expense
 
$
807

 
$
892

 
$
1,614

 
$
1,784

 
 
 
 
 
 
 
 
 
Postretirement Plan:
 
 

 
 

 
 
 
 
Service cost
 
$

 
$
1

 
$

 
$
2

Interest cost
 
55

 
71

 
110

 
142

Net amortization of gains
 
(146
)
 
(146
)
 
(292
)
 
(292
)
Postretirement Plan income
 
$
(91
)
 
$
(74
)
 
$
(182
)
 
$
(148
)


10.       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

16

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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 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

17

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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 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 June 20, 2016, the motion was granted. The NLRB filed its petition for certiorari in the similar case on September 9, 2016, which was granted on January 13, 2017. That case is now pending before the Supreme Court, and our case remains stayed.

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, briefing is complete, and oral argument is set for February 17, 2017.

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 June 27, 2016, the court granted the motion and compelled arbitration of the individual claims. The court retained jurisdiction of the PAGA claim and stayed that claim pending the outcome of arbitration. On September 8, 2016, the plaintiffs filed a motion for reconsideration of the court's order regarding the arbitration. On October 18, 2016, the court granted the plaintiffs' motion for reconsideration based on a recent decision by the Ninth Circuit Court of Appeals in Morris v. Ernst & Young, LLP, and reversed its order granting the motion to compel arbitration. The Company filed an appeal on November 16, 2016. The case will proceed in district court while the appeal is pending. The district court has set a trial date in the matter of February 6, 2018.
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. On July 21, 2016, Ms. Nguyen filed an amended complaint with no material differences from the original complaint. On August 25, 2016, the Company filed a motion to dismiss or to stay the case. The motion was heard on September 23, 2016. At the hearing, the court granted the Company's motion and stayed the Nguyen case in light of the Attia matter. On July 28, 2016, former employee Milca Connolly filed a representative action alleging only PAGA claims against The Neiman Marcus Group in the Superior Court of California, Orange County. Ms. Connolly’s complaint raises PAGA claims substantially identical to those raised in Attia and Nguyen based on allegations of failure to pay overtime and minimum wages, unlawful deductions from 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. The Company was served with the Complaint in Connolly on September 8, 2016. On October 11, 2016, the Company filed a motion to dismiss or stay the case in light of the Attia and Nguyen matters. At the hearing on November 18, 2016, the court granted the Company's motion to stay the case.
On September 27, 2016, a dormant Illinois putative class action lawsuit, Catherine Ohle v. Neiman Marcus Group, originally filed in the Circuit Court of Cook County, was revived by an Illinois appeals court when it reversed a June 2014 trial court's order granting summary judgment to the Company and dismissing the matter in its entirety. In Ohle, the plaintiff alleged that the

18

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Company’s prior practice of conducting pre-employment credit checks of sales associates and considering credit history as a factor in its hiring decisions violated the Illinois Employee Credit Privacy Act. The appellate court reversed, holding that no exemption applied. The Company appealed the decision to the Illinois Supreme Court, and review was denied on January 25, 2017. The case will be returned to the trial court for further proceedings.

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 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. The parties jointly requested, and the Court granted, an extension of time for filing a responsive pleading, which was due on December 28, 2016. On February 9, 2017, the Court denied the parties' request for another extension of time, dismissed the case without prejudice, and stated that plaintiffs could file a motion to reinstate. On March 8, 2017, plaintiffs filed their motion to reinstate, and the hearing is set for March 15, 2017.

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

Other.  We had $1.8 million in outstanding irrevocable letters of credit at January 28, 2017.  We had approximately $1.7 million in surety bonds at January 28, 2017 relating primarily to merchandise imports and state sales tax and utility requirements.
 


19

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

 
 

 
 

Balance, July 30, 2016
 
$
(19,168
)
 
$
(9,326
)
 
$
(87,347
)
 
$
(115,841
)
Other comprehensive earnings (loss)
 
2,496

 
1,986

 
(3,871
)
 
611

Amounts reclassified from accumulated other comprehensive loss
 

 
359

 

 
359

Balance, October 29, 2016
 
$
(16,672
)
 
$
(6,981
)
 
$
(91,218
)
 
$
(114,871
)
Other comprehensive earnings (loss)
 
(8,575
)
 
11,411

 
327

 
3,163

Amounts reclassified from accumulated other comprehensive loss
 

 
507

 

 
507

Balance, January 28, 2017
 
$
(25,247
)
 
$
4,937

 
$
(90,891
)
 
$
(111,201
)
 
The amounts reclassified from accumulated other comprehensive loss are recorded within interest expense on the Condensed Consolidated Statements of Operations.


12.       Stock-Based Awards
 
Incentive Plans.  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 purchase a total of 56,979 shares of common stock of Parent (the "Co-Invest Options").
 
The number of Co-Invest Options issued upon conversion of pre-Acquisition stock options was equal to the product of (a) the number of shares subject to the applicable pre-Acquisition stock options multiplied by (b) the ratio of the per share merger consideration over the fair market value of a share of Parent, which was approximately 3.1x (the "Exchange Ratio").  The exercise price of each pre-Acquisition stock option was adjusted by dividing the original exercise price of the pre-Acquisition stock option by the Exchange Ratio.  Following the conversion, the exercise prices of the Co-Invest Options range from $180 to $644 per share.  As of the date of the Acquisition, the aggregate intrinsic value of the Co-Invest Options equaled the aggregate intrinsic value of the rolled over pre-Acquisition stock options. The Co-Invest Options are fully vested and are exercisable at any time prior to the applicable expiration dates related to the original grant of the pre-Acquisition options.  The Co-Invest Options contain sale and repurchase provisions.

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.

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


20

Table of Contents


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

At January 28, 2017, an aggregate of 45,210 Co-Invest Options and time-vested options were held by Retirement Eligible Optionees. The recorded liability with respect to such options was $2.5 million at January 28, 2017, $5.5 million at July 30, 2016 and $19.8 million at January 30, 2016.

The following table sets forth certain summary information with respect to our stock options for the periods indicated:
 
 
Thirteen weeks ended
 
Twenty-six weeks ended
(in actuals)
 
January 28,
2017
 
January 30,
2016
 
January 28,
2017
 
January 30,
2016
 
 
 
 
 
 
 
 
 
Stock option grants:
 
 

 
 

 
 

 
 
Number of options granted
 

 
4,268

 
9,115

 
4,268

Weighted average grant date fair value
 
$

 
$
341

 
$
158

 
$
341

 
 
 
 
 
 
 
 
 
Stock option exercises:
 
 

 
 

 
 

 
 
Number of options exercised
 

 
626

 
609

 
626

Weighted average exercise price
 
$

 
$
1,205

 
$
180

 
$
1,205


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

Restricted Stock. On October 27, 2016, Parent approved grants of 26,954 restricted shares of common stock of Parent to certain executive officers and management employees. Subject to continued employment, shares of restricted stock will vest over three or four years in equal increments on each anniversary of December 1, 2016. Each year beginning in calendar 2017, subject to certain limitations, each recipient will have the ability to require Parent to acquire his or her vested shares (the "put right") during the 14-day period following the release of the Company's earnings in respect of its first fiscal quarter (such period, the "put period") for a purchase price equal to the fair market value of Parent's common stock at the beginning of the put period. Except as described below with respect to our Chief Executive Officer, a recipient will forfeit all unvested shares of restricted stock and may not exercise the put right with respect to any vested shares following the termination of his or her employment for any reason. Following a voluntary departure without good reason or a termination for cause, we have the right to repurchase any vested shares of restricted stock at par value ($0.001 per share).

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

At January 28, 2017, 24,350 shares of unvested restricted common stock were outstanding. The recorded liability with respect to such shares was $0.8 million at January 28, 2017.

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Stock Compensation Expense (Benefit). The following table summarizes our stock-based compensation expense (benefit):
 
 
Thirteen weeks ended
 
Twenty-six weeks ended
(in thousands)
 
January 28,
2017
 
January 30,
2016
 
January 28,
2017
 
January 30,
2016
 
 
 
 
 
 
 
 
 
Stock compensation expense (benefit):
 
 
 
 
 
 
 
 
Stock options
 
$
(1,704
)
 
$
1,927

 
$
(323
)
 
$
3,880

Restricted stock
 
840

 

 
840

 

Total
 
$
(864
)
 
$
1,927

 
$
517

 
$
3,880


For a more detailed description of our stock-based awards, refer to Note 15 of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended July 30, 2016.


13.       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.


14.       Other Expenses
 
Other expenses consist of the following components:
 
 
Thirteen weeks ended
 
Twenty-six weeks ended
(in thousands)
 
January 28,
2017
 
January 30,
2016
 
January 28,
2017
 
January 30,
2016
 
 
 
 
 
 
 
 
 
Expenses incurred in connection with strategic growth initiatives
 
$
1,932

 
$
3,895

 
$
8,485

 
$
18,271

MyTheresa acquisition costs
 
1,317

 
1,784

 
702

 
4,328

Other expenses
 
1,962

 
2,369

 
2,842

 
2,547

Total
 
$
5,211

 
$
8,048

 
$
12,029

 
$
25,146


We incurred professional fees and other costs in connection with our Organizing for Growth and NMG One strategic growth initiatives aggregating $1.9 million in the second quarter of fiscal year 2017, $3.9 million in the second quarter of fiscal year 2016, $8.5 million in year-to-date fiscal 2017 and $18.3 million in year-to-date fiscal 2016. In connection with Organizing for Growth, we eliminated approximately 90 positions on August 18, 2016 and approximately 500 positions on October 1, 2015 across our stores, divisions and facilities. We incurred severance costs of $3.3 million in year-to-date fiscal 2017 and $10.2 million in year-to-date fiscal 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.



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Table of Contents


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

All of NMG’s obligations under the Senior Secured Credit Facilities are guaranteed by Holdings and our current and future direct and indirect wholly owned subsidiaries, subject to exceptions as more fully described in Note 6 of the Notes to Condensed Consolidated Financial Statements.  All of NMG's obligations under the Cash Pay Notes and the PIK Toggle Notes are guaranteed by the same entities that guarantee the Senior Secured Credit Facilities, other than Holdings. Currently, the Company’s non-guarantor subsidiaries under the Senior Secured Credit Facilities, Cash Pay Notes and PIK Toggle Notes consist principally of 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 Senior Secured Credit Facilities, Cash Pay Notes and PIK Toggle Notes prepared on the equity basis of accounting.  The information is presented in accordance with the requirements of Rule 3-10 under the SEC’s Regulation S-X. The financial information may not necessarily be indicative of results of operations, cash flows or financial position had the non-guarantor subsidiaries operated as independent entities.

 
 
January 28, 2017
(in thousands)
 
Company
 
NMG
 
Guarantor Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
ASSETS
 
 

 
 
 
 

 
 

 
 

 
 

Current assets:
 
 

 
 
 
 

 
 

 
 

 
 

Cash and cash equivalents
 
$

 
$
42,960

 
$
596

 
$
4,887

 
$

 
$
48,443

Merchandise inventories
 

 
961,538

 
173,570

 
78,375

 

 
1,213,483

Other current assets
 

 
151,314

 
11,939

 
6,500

 
(2,878
)
 
166,875

Total current assets
 

 
1,155,812

 
186,105

 
89,762

 
(2,878
)
 
1,428,801

Property and equipment, net
 

 
1,448,157

 
146,969

 
5,690

 

 
1,600,816

Intangible assets, net
 

 
536,532

 
2,432,057

 
67,639

 

 
3,036,228

Goodwill
 

 
1,412,147

 
537,263

 
118,039

 

 
2,067,449

Other long-term assets
 

 
21,318

 
1,973

 

 

 
23,291

Intercompany notes receivable
 

 

 
199,460

 

 
(199,460
)
 

Investments in subsidiaries
 
809,811

 
3,411,988

 

 

 
(4,221,799
)
 

Total assets
 
$
809,811

 
$
7,985,954

 
$
3,503,827

 
$
281,130

 
$
(4,424,137
)
 
$
8,156,585

LIABILITIES AND MEMBER EQUITY
 
 

 
 

 
 
 
 

 
 

 
 

Current liabilities:
 
 

 
 

 
 
 
 

 
 

 
 

Accounts payable
 
$

 
$
370,409

 
$

 
$
13,739

 
$

 
$
384,148

Accrued liabilities
 

 
365,610

 
89,725

 
57,172

 
(2,878
)
 
509,629

Current portion of long-term debt
 

 
29,426

 

 

 

 
29,426

Total current liabilities
 

 
765,445

 
89,725

 
70,911

 
(2,878
)
 
923,203

Long-term liabilities:
 
 

 
 

 
 
 
 

 
 

 
 

Long-term debt
 

 
4,585,911

 

 

 

 
4,585,911

Intercompany notes payable
 

 

 

 
199,460

 
(199,460
)
 

Deferred income taxes
 

 
1,203,983

 

 
7,805

 

 
1,211,788

Other long-term liabilities
 

 
620,804

 
5,068

 

 

 
625,872

Total long-term liabilities
 

 
6,410,698

 
5,068

 
207,265

 
(199,460
)
 
6,423,571

Total member equity
 
809,811

 
809,811

 
3,409,034

 
2,954

 
(4,221,799
)
 
809,811

Total liabilities and member equity
 
$
809,811

 
$
7,985,954

 
$
3,503,827

 
$
281,130

 
$
(4,424,137
)
 
$
8,156,585



23

Table of Contents


 
 
July 30, 2016
(in thousands)
 
Company
 
NMG
 
Guarantor Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
ASSETS
 
 

 
 
 
 

 
 

 
 

 
 

Current assets:
 
 

 
 
 
 

 
 

 
 

 
 

Cash and cash equivalents
 
$

 
$
39,791

 
$
936

 
$
21,116

 
$

 
$
61,843

Merchandise inventories
 

 
917,138

 
145,518

 
62,669

 

 
1,125,325

Other current assets
 

 
129,663

 
15,082

 
4,904

 
(2,771
)
 
146,878

Total current assets
 

 
1,086,592

 
161,536

 
88,689

 
(2,771
)
 
1,334,046

Property and equipment, net
 

 
1,440,968

 
144,186

 
2,967

 

 
1,588,121

Intangible assets, net
 

 
566,084

 
2,605,413

 
73,005

 

 
3,244,502

Goodwill
 

 
1,412,146

 
537,263

 
123,409

 

 
2,072,818

Other long-term assets
 

 
15,153

 
2,248

 

 

 
17,401

Intercompany notes receivable
 

 

 
196,686

 

 
(196,686
)
 

Investments in subsidiaries
 
943,131

 
3,541,121

 

 

 
(4,484,252
)
 

Total assets
 
$
943,131

 
$
8,062,064

 
$
3,647,332

 
$
288,070

 
$
(4,683,709
)
 
$
8,256,888

LIABILITIES AND MEMBER EQUITY
 
 

 
 

 
 
 
 

 
 

 
 

Current liabilities:
 
 

 
 

 
 
 
 

 
 

 
 

Accounts payable
 
$

 
$
257,047

 
$
37,082

 
$
23,607

 
$

 
$
317,736

Accrued liabilities
 

 
373,108

 
70,488

 
51,821

 
(2,771
)
 
492,646

Current portion of long-term debt