Neiman Marcus 2005 Annual Report Download - page 119

Long-term Incentive Plan. Following the consummation of the Transactions, the Company created a long-term incentive
plan (Long-term Incentive Plan) that provides for a cash incentive payable upon a change of control, as defined, subject to the
attainment of certain performance objectives to employees who have historically been eligible for stock-based compensation.
Performance objectives and targets are based on cumulative EBITDA percentages for three year periods beginning in fiscal year
2006. Earned awards for each completed performance period will be credited to a book account and will earn interest at the rate of
5% annually until the award is paid. Awards will be paid within 30 days of a change of control or the first day there is a public market
of at least 20% of total outstanding common stock.
Cash Incentive Plan. Following the consummation of the Transactions, the Company also adopted a cash incentive plan
(Cash Incentive Plan) to aid in the retention of certain key executives. The Cash Incentive Plan provides for the creation of a $14
million cash bonus pool to be shared by all participants based on the number of vested and unvested stock options and underlying
shares that were granted pursuant to the Management Equity Incentive Plan. Each participant in the Cash Incentive Plan will be
entitled to a cash bonus upon the earlier to occur of a change of control or an initial public offering, as defined in the Cash Incentive
Plan, provided that the internal rate of return to the Sponsors is positive.
Investment in Kate Spade LLC. We currently own a 56% interest in Kate Spade LLC, which designs and markets high-end
designer handbags and accessories. A minority investor owns the remaining 44% interest. Our investment in and relationship with Kate
Spade LLC are governed by an operating agreement that provides for an orderly transition process in the event either investor wishes to
sell its interest, or purchase the other investor's interest. Among other things, this operating agreement contains currently exercisable put
option provisions entitling the minority investor to put its interest to us, and currently exercisable call option provisions entitling us to
purchase the minority investor's interest, at a purchase price mutually agreed to by the parties. The purchase price will be determined by
the parties or, in the event the parties are unable to agree on a mutually acceptable price, by a mutually acceptable nationally recognized
investment banking firm, subject to certain conditions. We may elect to defer the consummation of a put option for a period of six months
by cooperating with the minority investor in seeking either a sale of Kate Spade LLC to a third party or a public offering of Kate
Spade LLC's securities. If a sale to a third party or public offering of Kate Spade LLC's securities is not consummated within six months
after the exercise of the put option (which period may be automatically extended for an additional two months if a registration statement
for Kate Spade LLC is filed with the Securities and Exchange Commission), we are obligated to consummate the put option. Under the
terms of the Kate Spade LLC operating agreement, consummation of the put option shall occur within thirty days after the determination
of the valuation with respect to the exercise of the put option, unless we have elected to defer the consummation of the put option for the
six-month period referred to above, and should a third party sale or public offering of Kate Spade LLC occur within such six-month
period, we are required to pay the minority investor the excess, if any, of the put option valuation price for its interest over the amount it
realizes through the third party sale or public offering.
In April 2005, the minority investor in Kate Spade LLC exercised the put option described above with respect to the full amount
of its stake in such company. We subsequently entered into a standstill agreement to postpone the put process while we engaged in
discussions with the minority investor in Kate Spade LLC regarding certain strategic alternatives, including the possible sale of such
company. The standstill agreement, as extended, expired on March 21, 2006, but the parties are continuing to pursue discussions
regarding a possible sale of such company while the put valuation process proceeds. Although such discussions are ongoing, no assurance
can be given that they will ultimately lead to any transaction. It is possible that we may be required to purchase the shares of the minority
investor in Kate Spade LLC pursuant to the option as early as the second quarter of fiscal year 2007.
Litigation. We are currently involved in various legal actions and proceedings that arose in the ordinary course of business. We
believe that any liability arising as a result of these actions and proceedings will not have a material adverse effect on our financial
position, results of operations or cash flows.
Other. We had approximately $29.1 million of outstanding irrevocable letters of credit relating to purchase commitments and
insurance and other liabilities at July 29, 2006. We had approximately $4.0 million in surety bonds at July 29, 2006 relating primarily to
merchandise imports, state sales tax and utility requirements.
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