Neiman Marcus 2014 Annual Report Download - page 142

Table of Contents
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 and each grant consists of options to purchase an equal number of shares of Parent’s Class A common stock and Class B
common stock.
Accounting for Successor Stock Options. Prior to an initial public offering (IPO), Parent generally has the right to repurchase shares issued upon
exercise of vested stock options at the fair market value and shares underlying vested unexercised stock options for the difference between the fair market
value of the underlying share and the exercise price in the event the optionee ceases to be an employee of the Company. 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 plan agreements) 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.
As a result of Parent's repurchase rights prior to an IPO, 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) using the liability method. Under the liability method, we
recognize the estimated liability for option awards held by Retirement Eligible Optionees over the vesting periods of such awards and the liability for the
vested/earned options is adjusted to its estimated fair value through compensation expense at each balance sheet date. We recognized compensation expense
of $0.1 million in fiscal year 2015 and $6.2 million for the thirty-nine weeks ended August 2, 2014, which is 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.
With respect to the Co-Invest Options, the fair value of such options at the Acquisition date was $36.3 million. Of such amount, $9.5 million
represented the fair value of options held by Retirement Eligible Optionees for which a liability was established at the Acquisition date. The remaining value
of $26.8 million represented the fair value of options held by non-Retirement Eligible Optionees and such amount was credited to Successor equity.
Outstanding Stock Options. A summary of Successor stock option activity is as follows:










Outstanding at August 2, 2014
213,941
$ 858
Granted
20,243
1,166
Exercised
(258)
613
Forfeited
(10,698)
1,000
Outstanding at August 1, 2015
223,228
$ 880
7.2
Options exercisable at end of fiscal year
72,631
$ 584
4.4
At August 1, 2015, the aggregate number of Co-Invest Options and time-vested options held by Retirement Eligible Optionees was 55,269 options
and the recorded liability with respect to such options was $15.9 million.
Grant Date Fair Value of Stock Options. At the date of grant, the stock option exercise price equals or exceeds the fair market value of Parent's
common stock. 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 Parent Board or the Compensation Committee, as applicable, at the time option grants are awarded (Level 3 determination of fair value).
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.
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