Neiman Marcus 2006 Annual Report Download - page 113

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Loyalty Programs. We maintain customer loyalty programs in which customers accumulate points for qualifying purchases.
Upon reaching certain levels, customers may redeem their points for gifts. Generally, points earned in a given year must be redeemed no
later than 90 days subsequent to the end of the annual program period.
The estimates of the costs associated with the loyalty programs require us to make assumptions related to customer purchasing
levels, redemption rates and costs of awards to be chosen by our customers. Our customers redeem a substantial portion of the points
earned in connection with our loyalty programs for gift cards. At the time the qualifying sales giving rise to the loyalty program points are
made, we defer the portion of the revenues on the qualifying sales transactions equal to the estimate of the retail value of the gift cards to
be issued upon conversion of the points to gift cards. We record the deferral of revenues related to gift card awards under our loyalty
programs as a reduction of revenues. In addition, we charge the cost of all other awards under our loyalty programs to cost of goods sold.
Stock-Based Compensation - Predecessor. The Predecessor accounted for stock-based compensation awards to employees in
accordance with Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" (APB 25) and its related
interpretations. Accordingly, we recognized compensation expense on our restricted stock awards but did not recognize compensation
expense for stock options since all options granted had an exercise price equal to the market value of our common stock on the grant date.
We did not adopt the previous voluntary expense recognition provisions of SFAS No. 123, "Accounting for Stock-Based Compensation"
(SFAS 123), whereby the fair value of stock-based compensation awards would have been expensed over the terms of awards. However,
consistent with the disclosure requirements of SFAS 123, we made pro forma disclosures of the effect that application of the fair value
expense recognition provisions of SFAS 123 would have had on our net earnings.
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment" (SFAS 123(R)). This standard is a revision of
SFAS 123 and supersedes APB 25 and its related implementation guidance. SFAS 123(R) requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. We
adopted SFAS 123(R) as of the beginning of our first quarter of fiscal year 2006 using the modified prospective method, which required
us to record stock compensation for all unvested and new awards as of the adoption date. Accordingly, we have not restated prior period
amounts presented herein.
The following table illustrates the pro forma effect on net earnings for periods prior to the adoption of SFAS 123(R) as if the
Predecessor had applied the fair value recognition provisions of SFAS 123 during fiscal year 2005:
(in thousands)
Fiscal year
ended
July 30,
2005
Net earnings:
As reported $248,824
Add: stock-based employee compensation recorded under intrinsic value method, net of related
taxes 4,999
Less: stock-based employee compensation expense determined under fair value method, net of
related taxes (13,302)
Pro forma net earnings $240,521
The Predecessor estimated the fair value of each option grant on the date of the grant using the Black-Scholes option pricing
model with the following assumptions used for grants in fiscal year 2005:
July 30,
2005
Expected life (years) 5
Expected volatility 25.0%
Risk-free interest rate 3.3%
Dividend yield 1.0%
The weighted-average fair value of options granted was $14.38 in fiscal year 2005.
In connection with the adoption of the provisions of SFAS 123(R), we recorded non-cash charges for stock compensation of
approximately $20.0 million in the period from July 31, 2005 to October 1, 2005 primarily as a result of the accelerated vesting of all
Predecessor options and restricted stock in connection with the Transactions (see Note 2).
F-17