Neiman Marcus 2006 Annual Report Download - page 111

Leases. We lease certain retail stores and office facilities. Stores we own are often subject to ground leases. The terms of our real
estate leases, including renewal options, range from 12 to 101 years. Most leases provide for monthly fixed minimum rentals or
contingent rentals based upon sales in excess of stated amounts and normally require us to pay real estate taxes, insurance, common area
maintenance costs and other occupancy costs. For leases that contain predetermined, fixed calculations of the minimum rentals, we
recognize rent expense on a straight-line basis over the lease term.
We receive allowances from developers related to the construction of our stores. We record these allowances as deferred real
estate credits which we recognize as a reduction of rent expense on a straight-line basis over the lease term. We received construction
allowances aggregating $24.6 million in fiscal year 2007, $30.7 million for the forty-three weeks ended July 29, 2006, $2.0 million for the
nine weeks ended October 1, 2005 and $24.5 million in fiscal year 2005.
Financial Instruments. We use derivative financial instruments to help manage our interest rate risk. Effective December 6,
2005, NMG entered into floating to fixed interest rate swap agreements for an aggregate notional amount of $1,000.0 million to limit its
exposure to interest rate increases related to a portion of our floating rate indebtedness. The interest rate swap agreements terminate after
five years. At July 28, 2007, the fair value of NMG's interest rate swap agreements was a gain of approximately $8.2 million, which
amount is included in other assets.
As of the effective date, NMG designated the interest rate swaps as cash flow hedges. As a result, changes in the fair value of
NMG's swaps are recorded as a component of other comprehensive income. At July 28, 2007, we have $3.7 million of unrecognized gains, net of
tax, on our interest rate swap agreements included in other comprehensive income.
As a result of the swap agreements, NMG's effective fixed interest rates as to the $1,000.0 million in floating rate indebtedness
will currently range from 6.482% to 6.733% per quarter through 2010 and result in an average fixed rate of 6.577%.
Benefit Plans. We sponsor a noncontributory defined benefit pension plan (Pension Plan) covering substantially all full-time
employees and an unfunded supplemental executive retirement plan (SERP Plan) which provides certain employees additional pension
benefits. In calculating our obligations and related expense, we make various assumptions and estimates, after consulting with outside
actuaries and advisors. The annual determination of expense involves calculating the estimated total benefits ultimately payable to plan
participants and allocating this cost to the periods in which services are expected to be rendered. We use the projected unit credit method
in recognizing pension liabilities. The Pension and SERP Plans are valued annually as of the beginning of each fiscal year.
Significant assumptions related to the calculation of our obligations include the discount rate used to calculate the present value
of benefit obligations to be paid in the future, the expected long-term rate of return on assets held by the Pension Plan and the average rate
of compensation increase by plan participants. We review these assumptions annually based upon currently available information,
including information provided by our actuaries.
Self-insurance and Other Employee Benefit Reserves. We use estimates in the determination of the required accruals for general
liability, workers' compensation and health insurance as well as short-term disability, supplemental executive retirement benefits and
postretirement health care benefits. We base these estimates upon an examination of historical trends, industry claims experience and, in
certain cases, calculations performed by third-party actuaries. Projected claims information may change in the future and may require us
to revise these reserves.
Other Long-term Liabilities. Other long-term liabilities consist primarily of certain employee benefit obligations, postretirement
health care benefit obligations and the liability for scheduled rent increases.
Revenues. Revenues include sales of merchandise and services and delivery and processing revenues related to merchandise
sold. Revenues from our Specialty Retail stores are recognized at the later of the point of sale or the delivery of goods to the customer. Revenues from our
Direct Marketing operation are recognized when the merchandise is delivered to the customer. Revenues exclude sales taxes collected from our customers.
We maintain reserves for anticipated sales returns primarily based on our historical trends related to returns by our retail and direct marketing customers. Our
reserves for anticipated sales returns aggregated $48.8 million at July 28, 2007 and $43.7 million at July 29, 2006.
Buying and Occupancy Costs. Our buying costs consist primarily of salaries and expenses incurred by our merchandising and
buying operations. Occupancy costs primarily include rent, property taxes and operating costs of our retail, distribution and support
facilities and exclude depreciation expense.
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