Neiman Marcus 2006 Annual Report Download - page 128

NOTE 10. OTHER EXPENSE, NET
Other Income. In the first quarter of fiscal year 2007, we received consideration aggregating $4.2 million, or 0.1% of
revenues, in connection with the merger of Wedding Channel.com, in which we held a minority interest, and The Knot. We accounted
for our investment in Wedding Channel.com under the cost method. In prior years, we had previously reduced our carrying value of
this investment to zero.
In the fourth quarter of fiscal year 2007, we recorded $6.0 million of other income for the breakage on gift cards we previously
sold and issued. The income was recognized based upon our analysis of the aging of these gift cards, our determination that the
likelihood of future redemption is remote and our determination that such balances are not subject to escheatment laws applicable to our
operations. Prior to the fourth quarter of fiscal year 2007, we had not recognized breakage on gift cards pending, among other things, our
final determination of the applicable escheatment laws applicable to our operations. We will evaluate gift card breakage in the future on
an ongoing basis. We do not believe gift card breakage will have a material impact on our future operations.
Other Expense. In the fourth quarter of fiscal year 2007, we recorded a $11.5 million pretax impairment charge related to the
writedown to fair value in the net carrying value of the Horchow tradename based upon lower anticipated future revenues associated with
the brand.
NOTE 11. COMMON SHAREHOLDERS' EQUITY
Successor
Carryover Basis Adjustment for Management Shareholders. Executive management participants held certain equity interests,
including stock options, in the Predecessor prior to the Transactions and continue to hold equity interests in the Company, representing
indirect equity interests in the Successor after the Transactions. In accordance with the provisions of Emerging Issues Task Force
No. 88-16, "Basis in Leveraged Buyout Transactions," the basis of executive management's indirect interests in the Successor after the
Transactions is carried over at the basis of their interests in the Predecessor prior to the Transactions. The carryover basis of such interests
less the net cash received by the management participants represents a deemed dividend of $69.2 million to the management participants
and has been recognized as a reduction to shareholders' equity in connection with the Transactions.
Successor Stock-Based Compensation Accounting. The Company has approved equity-based management arrangements
which authorize equity awards to be granted to certain management employees for up to 87,992.0 shares of the common stock of the
Company. Options generally vest over four to five years and expire 10 years from the date of grant.
A summary of the status of our stock option plan as of July 28, 2007 and July 29, 2006 and changes during the fiscal periods
ended on these dates is as follows:
July 28, 2007 July 29, 2006
Shares
Weighted
Average
Exercise Price Shares
Weighted
Average
Exercise Price
Outstanding at beginning of year 81,716.3 $ 1,416 — $ —
Granted 2,496.0 1,942 81,716.3 1,416
Exercised (578.0 )1,590 — —
Outstanding at end of year 83,634.3 $ 1,430 81,716.3 $ 1,416
Options exercisable at end of year 29,764.1 $ 1,233 7,283.3 $ 359
The exercise price of approximately 50% of such options escalate at a 10% compound rate per year until the earlier to occur of
(i) exercise, (ii) the fifth anniversary of the date of grant or (iii) the occurrence of a change in control. However, in the event the Sponsors
cause the sale of shares of the Company to an unaffiliated entity, the exercise price will cease to accrete at the time of the sale with respect
to a pro rata portion of the accreting options.
All grants of stock options have an exercise price equal to the fair market value of our common stock on the date of grant.
Because we are privately held and there is no public market for our common stock subsequent to the Transactions, the fair market
value of our common stock is determined by our Compensation Committee periodically based upon a number of factors. In October
2006, a valuation of our common stock was performed to assist the Compensation Committee in this
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