Neiman Marcus 2006 Annual Report Download - page 119

NOTE 5. TRANSACTIONS WITH SPONSORS
In connection with the Transactions, we entered into a management services agreement with affiliates of the Sponsors pursuant
to which affiliates of one of the Sponsors received on the closing date a transaction fee of $25 million in cash. Affiliates of the other
Sponsor waived any cash transaction fee in connection with the Transactions.
In addition, pursuant to such agreement, and in exchange for on-going consulting and management advisory services that will be
provided to us by the Sponsors and their affiliates, affiliates of the Sponsors will receive an aggregate annual management fee equal to the
lesser of (i) 0.25% of our consolidated annual revenues or (ii) $10 million. Affiliates of the Sponsors will also receive reimbursement for
out-of-pocket expenses incurred by them or their affiliates in connection with services provided pursuant to the agreement. These
management fees are payable quarterly in arrears. During fiscal year 2007 and the forty-three weeks ended July 29, 2006, we recorded
management fees of $10.0 million and $8.7 million, respectively, which are included in selling, general and administrative expenses in
the consolidated statements of earnings.
The management services agreement also provides that affiliates of the Sponsors may receive future fees in connection with
certain subsequent financing and acquisition or disposition transactions. The management services agreement includes customary
exculpation and indemnification provisions in favor of the Sponsors and their affiliates.
NOTE 6. CREDIT CARD PROGRAM
Credit Card Sale. On July 7, 2005, HSBC Bank Nevada, National Association (HSBC) purchased our approximately three
million private label Neiman Marcus and Bergdorf Goodman credit card accounts and related assets, as well as the outstanding balances
associated with such accounts (Credit Card Sale). The total purchase price was approximately $647 million, consisting of $534 million in
net cash proceeds and the assumption of approximately $113 million of our outstanding debt under our previous revolving credit card
securitization facility (Credit Card Facility). We recognized a gain of $6.2 million in connection with the sale of our credit card portfolio
to HSBC in the fourth quarter of fiscal year 2005.
As a part of the Credit Card Sale, we entered into a long-term marketing and servicing alliance with HSBC that expires in June
2010. Under the terms of this alliance, HSBC offers credit card and non-card payment plans and bears all credit risk with respect to sales
transacted on the cards bearing our brands. We receive ongoing payments from HSBC related to credit card sales and compensation for
marketing and servicing activities (HSBC Program Income). In addition, we continue to handle certain key customer service functions. In
tandem with HSBC, we have initiated various changes in our credit card program to alter the credit terms available to our cardholders and
to enhance the earnings of the portfolio. These changes have increased the level of HSBC Program Income earned by the Company. In
the future, the HSBC Program Income may be either decreased based upon the level of future services we provide to HSBC or increased
based upon other changes to our historical credit card program related to, among other things, the interest rates applied to unpaid balances
and the assessment of late fees.
Prior to the Credit Card Sale. Pursuant to a revolving credit card securitization program that began in September 2000 (Credit
Card Facility), we securitized our credit card receivables in a series of transactions involving the transfer of the receivables to a wholly-
owned subsidiary and the sale of the receivables to a special-purpose entity. As a result of these transactions, we borrowed $225.0 million
from third-party investors, which borrowings were collateralized by undivided interests in our credit card portfolio.
During the term of the Credit Card Facility, we recorded the finance charge income generated by our credit card operations, net
of credit losses as finance charge income. In addition, we incurred interest on the $225.0 million principal amount of the outstanding
borrowings pursuant to the Credit Card Facility at a contractually-defined rate of one month LIBOR plus 0.27% annually.
Beginning in April 2005, the $225.0 million principal balance of the outstanding borrowings pursuant to the Credit Card Facility
were payable in six monthly installments of $37.5 million. Prior to the Credit Card Sale, we had repaid $112.5 million of the principal
balance and had placed $40.7 million on deposit to fund future repayment obligations. In connection with the Credit Card Sale, HSBC
assumed our outstanding obligations related to the Credit Card Facility.
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